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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

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 Info

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

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