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.