DP16829 One Scheme Fits All: A Central Fiscal Capacity for the EMU Targeting Eurozone, National and Regional Shocks

Author(s): Roel Beetsma, Jacopo Cimadomo, Josha Van Spronsen
Publication Date: December 2021
Date Revised: December 2021
Keyword(s): central fiscal capacity, Macroeconomic stabilisation, multilevel factor model
JEL(s): C38, E32, E62, E63
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16829

This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shock within a single scheme, thus policymakers can decide on the stabilisation of one shock versus the others according to political and economic considerations. Our analysis, based on NUTS3 regional data over the last two decades, shows that - with a limited central budget and a low risk of moral hazard - substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were less severe and therefore needed less stabilisation. Aggregating the transfers over the three levels, they are of the order of magnitude of the EU's Recovery and Resilience Facility.