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How to Limit the Moral Hazard Related to a European Stabilization Mechanism

Author

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  • MENGUY, Séverine

    () (University of Paris X)

Abstract

The paper studies the opportunity to introduce a centralized insurance mechanism in Europe. Indeed, in a monetary union, monetary policy can efficiently stabilize common shocks but it is much less usable in case of asymmetrical shocks and /or if the countries are structurally heterogeneous. Thus, the national and decentralized stabilization policies could be efficiently complemented by a global insurance mechanism. Indeed, introducing state dependent federal transfers is beneficial if the variance of demand or supply shocks is sufficiently high in comparison with the disincentive effect of these transfers on the national effort to reduce the variance of idiosyncratic shocks. Nevertheless, a state independent federal premium would then also be useful in order to avoid the moral hazard problem implied by a centralized insurance mechanism.

Suggested Citation

  • MENGUY, Séverine, 2010. "How to Limit the Moral Hazard Related to a European Stabilization Mechanism," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 25, pages 252-275.
  • Handle: RePEc:ris:integr:0504
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    Citations

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    Cited by:

    1. Alexandra M. D. Hild & Bernhard Herz & Christian Bauer, 2016. "The European Stability Mechanism - bastion of calm or crisis accelerant?," Research Papers in Economics 2016-12, University of Trier, Department of Economics.
    2. Herz, Bernhard & Bauer, Christian & Hild, Alexandra, 2016. "Designing the ESM—Who Profits, Who Pays?," Annual Conference 2016 (Augsburg): Demographic Change 145709, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Economic and Monetary Union; Fiscal Federalism; Stabilization policy; Insurance Mechanism;

    JEL classification:

    • 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; Treasury Policy
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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