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WPS7130 d e z i r o h t u A e r Policy Research Working Paper 7130 u s o l c s i D c i l b u P d e z i r o h t u A e r u Incomplete Integration and Contagion s o l c s i of Debt Distress in Economic Unions D c i l b u P Cem Karayalcin Harun Onder d e z i r o h t u A e r u s o l c s i D c i l b u P d e z i r o h t u A e r u s o l c s i D c i l b u P Macroeconomics and Fiscal Management Global Practice Group December 2014 Policy Research Working Paper 7130 Abstract This paper compares different fiscal integration schemes Moreover, complete integration schemes are shown to on the basis of their ability to finance public investments be more resilient to idiosyncratic shocks and more effec- and resilience to debt distress and contagion. Complete tive in limiting contagion of debt distress. This is mainly integration schemes, where a central authority chooses the because the central authority can credibly borrow more level of public investments with productivity-enhancing without risking default than member states taken together externalities across different jurisdictions, are shown to can and it can “transfer resilience” across them if needed. be superior to incomplete integration schemes, where These findings inform discussions on structural aspects of member governments choose public investments unilater- secular stagnation in