IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The optimal size of the European Stability Mechanism: A cost-benefit analysis

  • Daniel Kapp
Registered author(s):

    This study presents a core-periphery model to determine the optimal size of the European Stability Mechanism (ESM), building on Jeanne and Ranciere (2011). While the periphery is subject to a probability of losing access to external credit, the core's incentive for setting up an ESM stems exclusively from the spillover effects present in the case of periphery default. The model develops regional best response functions, determining a set of feasible ranges for the total ESM size, given optimal regional contributions. The model is then calibrated to the European Economic and Monetary Union. If costs from default are reasonably high, the probability of the periphery not having access to external credit is sufficiently large, and spillover effects to the core are present, both the core and the periphery have an interest in contributing to the ESM. Calibration and sensitivity analysis suggest that the optimal ESM size is between the current and twice the size of the agreed-upon ESM.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20349_tcm47-277028.pdf
    Download Restriction: no

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 349.

    as
    in new window

    Length:
    Date of creation: Aug 2012
    Date of revision:
    Handle: RePEc:dnb:dnbwpp:349
    Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
    Web page: http://www.dnb.nl/en/

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Laura Alfaro & Fabio Kanczuk, 2007. "Optimal Reserve Management and Sovereign Debt," NBER Working Papers 13216, National Bureau of Economic Research, Inc.
    2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
    3. Romain Ranciere & Aaron Tornell & Frank Westermann, 2002. "Systemic Crises and Growth," Working Papers 190, Barcelona Graduate School of Economics.
    4. C. Emre Alper & Lorenzo Forni & Marc Gerard, 2012. "Pricing of Sovereign Credit Risk; Evidence From Advanced Economies During the Financial Crisis," IMF Working Papers 12/24, International Monetary Fund.
    5. Marco E. Terrones & Enrique G. Mendoza & Ceyhun Bora Durdu, 2008. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism," 2008 Meeting Papers 56, Society for Economic Dynamics.
    6. Tito Cordella & Eduardo Levy Yeyati, 2006. "A (New) Country Insurance Facility," International Finance, Wiley Blackwell, vol. 9(1), pages 1-36, 05.
    7. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Center for International Economics, Working Paper Series qt38j2b036, Center for International Economics, UC Santa Cruz.
    8. Eduardo Levy Yeyati & Tito Cordella, 2004. "Country Insurance," IMF Working Papers 04/148, International Monetary Fund.
    9. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
    10. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December.
    11. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, June.
    12. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
    13. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
    14. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    15. Mink, Mark & de Haan, Jakob, 2013. "Contagion during the Greek sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 102-113.
    16. Flavia Corneli & Emanuele Tarantino, 2011. "Reserve management and sovereign debt cost in a world with liquidity crises," Temi di discussione (Economic working papers) 797, Bank of Italy, Economic Research and International Relations Area.
    17. Jeanne, Olivier & Rancière, Romain, 2008. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," CEPR Discussion Papers 6723, C.E.P.R. Discussion Papers.
    18. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    19. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
    20. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    21. Paolo Mauro & Törbjörn I. Becker, 2006. "Output Drops and the Shocks That Matter," IMF Working Papers 06/172, International Monetary Fund.
    22. Davide Furceri & Aleksandra Zdzienicka, 2011. "How Costly Are Debt Crises?," IMF Working Papers 11/280, International Monetary Fund.
    23. Asgharian, Hossein & Nossman, Marcus, 2011. "Risk contagion among international stock markets," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 22-38, February.
    24. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    25. Marcello Pericoli & Massimo Sbracia, 2001. "A Primer on Financial Contagion," Temi di discussione (Economic working papers) 407, Bank of Italy, Economic Research and International Relations Area.
    26. Jonathan David Ostry & Jeromin Zettelmeyer, 2005. "Strengthening IMF Crisis Prevention," IMF Working Papers 05/206, International Monetary Fund.
    27. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
    28. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
    29. Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    30. Jeanne, Olivier & Ostry, Jonathan D & Zettelmeyer, Jeromin, 2008. "A Theory of International Crisis Lending and IMF Conditionality," CEPR Discussion Papers 7022, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:349. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.