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

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Hammond, George
von Hagen, Jürgen

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1170.

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Date of creation: May 1995
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Handle: RePEc:cpr:ceprdp:1170

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Related research
Keywords: Business Cycles; Fiscal Federalism; Monetary Union; Stabilization Policy;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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  1. Beetsma, Roel & Debrun, Xavier & Klaassen, Frank, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Amador, Joao L. M., 2000. "Fiscal Federalism in Continuous Time Stochastic Economies," FEUNL Working Paper Series wp383, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  3. Engwerda, J.C. & Aarle, B. van & Plasmans, J.E.J., 1998. "Fiscal policy interaction in the EMU," Discussion Paper 113, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Büttner, Thiess, 1999. "Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany," ZEW Discussion Papers 99-23, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  5. Shu-ki Tsang, 2002. "From "One Country, Two Systems" to Monetary Integration?," Working Papers 152002, Hong Kong Institute for Monetary Research. [Downloadable!]
  6. Moller, Joachim, 2001. "Regional Adjustment Dynamics," Discussion Paper Series 26180, Hamburg Institute of International Economics. [Downloadable!]
  7. Robin Boadway & Masayoshi Hayashi, 2004. "An Evaluation of the Stabilization Properties of Equalization in Canada," Canadian Public Policy, University of Toronto Press, vol. 30(1), pages 91-109, March. [Downloadable!] (restricted)
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  8. António Afonso & Davide Furceri, 2007. "Business cycle synchronization and insurance mechanisms in the EU," Working Paper Series 844, European Central Bank. [Downloadable!]
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  9. Pacheco, Luís Miguel, 2000. "Fiscal Federalism, EMU and Shock Absorption Mechanisms: A Guide to the Literature," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 4, 03. [Downloadable!]
  10. BARBIER-GAUCHARD Amélie, 2005. "Fiscal federalism, discipline and selection adverse in the EU : Lessons from a theoretical model," Economics Bulletin, AccessEcon, vol. 5(11), pages 1-8. [Downloadable!]
  11. Fidrmuc, J. & Horvath, J., 1998. "Stability of monetary unions : lessons from the break-up of Czechoslovakia," Discussion Paper 74, Tilburg University, Center for Economic Research. [Downloadable!]
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  12. Amélie Barbier-Gauchard, 2005. "Fiscal Federalism, discipline and selection adverse in the EU : Lessons from a theoretical model," Post-Print halshs-00007797_v1, HAL. [Downloadable!]
  13. Davide Furceri, 2004. "Does the EMU Need a Fiscal Transfer Mechanism?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(3), pages 418-428.
  14. Barry Eichengreen, 1998. "Saving Europe's Automatic Stabilizers," Macroeconomics 9805013, EconWPA. [Downloadable!]
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