[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/eps/cepswp/12963.html
   My bibliography  Save this paper

Hamilton’s Paradox Revisited: Alternative lessons from US history

Author

Listed:
  • Schelkle, Waltraud
Abstract
Armed with the knowledge of today, a scholar revisits the US historical experience with fiscal federalism and learns how it avoided three pitfalls now facing the euro area. The lingering crisis of the euro area has made leading observers call for the completion of the economic and monetary union with fiscal federalism. They point to the US federation as the example to emulate. Opponents can point to evidence from US history that strong fiscal capacities at the federal level lead to free-riding at the member state level, with “spectacular debt accumulation and disastrous failures of macroeconomic policy” (Rodden, 2006: 2) in its wake. This paper revisits the historical US evidence with the knowledge of today. It takes lessons from the euro area crisis to see whether they apply to the history of the US dollar area. The first lesson asks whether political-fiscal union should come before monetary union; a second lesson concerns the need for fiscal union; and the final lesson is about the question where fiscal discipline should be located in a monetary union. Lessons from the euro area crisis reveal trade-offs that neither monetary union can evade. This becomes apparent if one looks at the interfaces of a fiscal federation with financial and monetary integration.

Suggested Citation

  • Schelkle, Waltraud, 2017. "Hamilton’s Paradox Revisited: Alternative lessons from US history," CEPS Papers 12963, Centre for European Policy Studies.
    • Handle: RePEc:eps:cepswp:12963
    as

    Download full text from publisher

    File URL: https://www.ceps.eu/system/files/WD2017_10%20WSchelkle%20HamiltonsParadox.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alcidi, Cinzia & D’Imperio, Paolo & Thirion, Gilles, 2023. "Risk-sharing and consumption-smoothing patterns in the US and the Euro Area: A comprehensive comparison," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 58-69.
    2. Trescott, Paul B., 1955. "Federal-State Financial Relations, 1790–1860," The Journal of Economic History, Cambridge University Press, vol. 15(3), pages 227-245, September.
    3. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 291-333.
    4. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
    5. C. Randall HENNING & Martin KESSLER, 2012. "Fiscal Federalism: US History for Architects of Europe’s Fiscal Union," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 1-31.
    6. Acemoglu, Daron & Woodford, Michael (ed.), 2012. "NBER Macroeconomics Annual 2011," National Bureau of Economic Research Books, University of Chicago Press, number 9780226002149, July.
    7. Curzio Giannini, 2011. "The Age of Central Banks," Books, Edward Elgar Publishing, number 14371.
    8. Eugene N. White, 2015. "Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta's Dissenting Policy," NBER Working Papers 21341, National Bureau of Economic Research, Inc.
    9. Martin Sandbu, 2015. "Europe’s Orphan: The Future of the Euro and the Politics of Debt," Economics Books, Princeton University Press, edition 1, number 10564.
    10. Hall, George J. & Sargent, Thomas J., 2014. "Fiscal discriminations in three wars," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 148-166.
    11. Follette, Glenn & Kusko, Andrea & Lutz, Byron, 2008. "State and Local Finances and the Macroeconomy: The High–Employment Budget and Fiscal Impetus," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(3), pages 531-545, September.
    12. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
    13. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2014. "Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators," Journal of Financial Stability, Elsevier, vol. 15(C), pages 1-17.
    14. Daron Acemoglu & Jonathan Parker & Michael Woodford, 2012. "Front matter to "NBER Macroeconomics Annual 2012, Volume 27"," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27, National Bureau of Economic Research, Inc.
    15. John Joseph Wallis & Richard E. Sylla & Arthur Grinath III, 2004. "Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839-1843," NBER Working Papers 10753, National Bureau of Economic Research, Inc.
    16. Paul De Grauwe, 2014. "The Governance of a Fragile Eurozone," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 12, pages 297-320, World Scientific Publishing Co. Pte. Ltd..
    17. Schelkle, Waltraud, 2017. "The Political Economy of Monetary Solidarity: Understanding the Euro Experiment," OUP Catalogue, Oxford University Press, number 9780198717935.
    18. Paul Krugman, 2013. "Revenge of the Optimum Currency Area," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 439-448.
    19. Sylla, Richard & Legler, John B. & Wallis, John J., 1987. "Banks and State Public Finance in the New Republic: The United States, 1790–1860," The Journal of Economic History, Cambridge University Press, vol. 47(2), pages 391-403, June.
    20. Svec Justin & Kondo Ayako, 2012. "Fiscal Policy Cyclicality and Growth within the US States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-35, March.
    21. Walker F. Todd, 1994. "Similarities and dissimilarities in the collapses of three state- chartered private deposit insurance funds," Working Papers (Old Series) 9411, Federal Reserve Bank of Cleveland.
    22. Broz, J. Lawrence, 1998. "The Origins of Central Banking: Solutions to the Free-Rider Problem," International Organization, Cambridge University Press, vol. 52(2), pages 231-268, April.
    23. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2011. "Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," Research in Labor Economics, in: Who Loses in the Downturn? Economic Crisis, Employment and Income Distribution, pages 227-255, Emerald Group Publishing Limited.
    24. Dolls, Mathias & Fuest, Clemens & Heinemann, Friedrich & Peichl, Andreas, 2015. "Reconciling insurance with market discipline: A blueprint for a European fiscal union," ZEW Discussion Papers 15-044, ZEW - Leibniz Centre for European Economic Research.
    25. Daron Acemoglu & Michael Woodford, 2012. "NBER Macroeconomics Annual 2011, Volume 26," NBER Books, National Bureau of Economic Research, Inc, number acem11-1.
    26. Waltraud Schelkle, 2012. "European Fiscal Union: From Monetary Back Door to Parliamentary Main Entrance," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(01), pages 28-34, April.
    27. James, Harold, 2012. "Making the European Monetary Union," Economics Books, Harvard University Press, number 9780674066830, Spring.
    28. Mathias Dolls & Clemens Fuest & Friedrich Heinemann & Andreas Peichl, 2016. "Editor's Choice Reconciling Insurance with Market Discipline: a Blueprint for a European Fiscal Union," CESifo Economic Studies, CESifo Group, vol. 62(2), pages 210-231.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cimadomo, Jacopo & Gordo Mora, Esther & Palazzo, Alessandra Anna, 2022. "Enhancing private and public risk sharing: lessons from the literature and reflections on the COVID-19 crisis," Occasional Paper Series 306, European Central Bank.
    2. Giovannini, Alessandro & Ioannou, Demosthenes & Stracca, Livio, 2022. "Public and private risk sharing: friends or foes? The interplay between different forms of risk sharing," Occasional Paper Series 295, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schelkle, Waltraud, 2018. "The political economy of monetary solidarity: revisiting the Euro experiment," LSE Research Online Documents on Economics 90201, London School of Economics and Political Science, LSE Library.
    2. Waltraud Schelkle, 2018. "The political economy of monetary solidarity: revisiting the euro experiment," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 44(3), pages 371-403.
    3. Paolo D’Imperio & Waltraud Schelkle, 2017. "What Difference Would a Capital Markets Union Make for Risk-Sharing in the EU?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 86(2), pages 77-88.
    4. Sebastian Blesse & Pierre C Boyer & Friedrich Heinemann & Eckhard Janeba & Anasuya Raj, 2019. "European Monetary Union reform preferences of French and German parliamentarians," European Union Politics, , vol. 20(3), pages 406-424, September.
    5. Thirion, Gilles, 2017. "European Fiscal Union: Economic rationale and design challenges," CEPS Papers 12160, Centre for European Policy Studies.
    6. Cornand, Camille & Gandré, Pauline & Gimet, Céline, 2016. "Increase in home bias in the Eurozone debt crisis: The role of domestic shocks," Economic Modelling, Elsevier, vol. 53(C), pages 445-469.
    7. Bacchetta, Philippe & Perazzi, Elena & van Wincoop, Eric, 2018. "Self-fulfilling debt crises: What can monetary policy do?," Journal of International Economics, Elsevier, vol. 110(C), pages 119-134.
    8. Deborah Mabbett & Waltraud Schelkle, 2014. "Searching under the lamp-post: the evolution of fiscal surveillance," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 5, London School of Economics / European Institute.
    9. Helge Berger & Giovanni Dell’Ariccia & Maurice Obstfeld, 2019. "Revisiting the Economic Case for Fiscal Union in the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 657-683, September.
    10. Day Manoli & Andrea Weber, 2016. "Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions," American Economic Journal: Economic Policy, American Economic Association, vol. 8(4), pages 160-182, November.
    11. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819, February.
    12. Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl, 2018. "An unemployment insurance scheme for the euro area? A comparison of different alternatives using microdata," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 273-309, February.
    13. Philip R. Lane, 2021. "The Resilience of the Euro," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 3-22, Spring.
    14. Gabriel Chodorow-Reich, 2017. "Geographic Cross-Sectional Fiscal Multipliers: What Have We Learned?," 2017 Meeting Papers 1214, Society for Economic Dynamics.
    15. Labrinidis, George, 2018. "The roots of the Euro," MPRA Paper 86560, University Library of Munich, Germany.
    16. Deborah Mabbett & Waltraud Schelkle, 2014. "Searching under the lamp-post: the evolution of fiscal surveillance," LEQS – LSE 'Europe in Question' Discussion Paper Series 75, European Institute, LSE.
    17. Geoffrey R. D. Underhill & Erik Jones, 2023. "Optimum financial areas: Retooling the governance of global finance," The World Economy, Wiley Blackwell, vol. 46(6), pages 1582-1608, June.
    18. Heimberger, Philipp, 2023. "Public debt and r-g risks in advanced economies: Eurozone versus stand-alone," Journal of International Money and Finance, Elsevier, vol. 136(C).
    19. Magdalena Kąkol, 2017. "Designing a fiscal union for the euro area," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 16(4), pages 413-432, December.
    20. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eps:cepswp:12963. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Margarita Minkova (email available below). General contact details of provider: https://edirc.repec.org/data/cepssbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.