Abstract
The relative desirability of a centralized or decentralized fiscal authority depends on both the borrowing externality identified in Berriel et al. and the informational cost of centralizing spending decisions. It is not ex-ante obvious which force dominates as the number of countries grows, but the institutional design of the European system suggests that the externality dominates in practice. We compare a fully centralized solution with a threshold rule akin to the deficit limits of the Maastricht treaty. When the externality effect dominates, the value of flexibility afforded by deficit limits becomes smaller in a larger union.
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