The Limits to Partial Banking Unions: A Political Economy Approach | Zendy

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The Limits to Partial Banking Unions: A Political Economy Approach

Author(s) -

Dana Foarta

Publication year - 2018

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20141388

Subject(s) - bailout , autarky , economics , economic rent , welfare , distortion (music) , politics , order (exchange) , monetary economics , partial equilibrium , international economics , market economy , macroeconomics , general equilibrium theory , finance , financial crisis , law , political science , amplifier , cmos , electronic engineering , engineering

This paper studies the welfare effects of a "partial banking union" in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.

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