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Title: Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community

Author(s): George Hammond and Jürgen von Hagen

Publication Date: May 1995

Keyword(s): Business Cycles, Fiscal Federalism, Monetary Union and Stabilization Policy

Programme Area(s): International Macroeconomics

Abstract: The loss of the exchange rate as an independent policy instrument implied by EMU has spurred calls for an insurance scheme as a buffer against temporary, asymmetric shocks to national income. We study the potential properties of such a system using historical data from the 12 EC economies. An insurance scheme with reasonable properties can be implemented on the basis of a fairly complex econometric formula. Simplifying the computation of the transfers severely worsens the performance of the system, however. Forcing the system to balance financially is not a critical constraint. The simulations show that stabilizing asymmetric shocks around a common trend may amplify the univariate variance of GDP for some member countries.

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Bibliographic Reference

Hammond, G and von Hagen, J. 1995. 'Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1170