DP1170 Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community

Author(s):	George Hammond, Jürgen von Hagen
Publication Date:	May 1995
Keyword(s):	Business Cycles, Fiscal Federalism, Monetary Union, Stabilization Policy
JEL(s):	E32, E52, E63, F42
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1170

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.