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A minimal moral hazard central stabilisation capacity for the EMU based on world trade

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  • Beetsma, Roel
  • Cima, Simone
  • Cimadomo, Jacopo

Abstract

Recent debate has focused on the introduction of a central stabilisation capacity as a completing element of the Economic and Monetary Union. Its main objective would be to contribute cushioning country-specific economic shocks, especially when national fiscal stabilisers are run down. There are two main potential objections to such schemes proposed so far: first, they may lead to moral hazard, i.e. weaken the incentives for sound fiscal policies and structural reforms. Second, they may generate permanent transfers among countries. Here we present a scheme that is relatively free from moral hazard, because the transfers are based on changes in world trade in the various sectors. These changes can be considered as largely exogenous, hence independent from an individual government’s policy; therefore, the scheme is better protected against manipulation. Our scheme works as follows: if a sector is hit by a bad shock at the world market level, then a country with an economic structure that is skewed towards this sector receives a (one-time) transfer from the other countries. The scheme is designed such that the transfers add up to zero each period, hence obviating the need for a borrowing capacity. We show that the transfers generated by our scheme tend to be countercyclical and larger when economies are less diversified. In addition, since transfers are based on temporary changes in world trade, the danger of permanent transfers from one set of countries to the other countries is effectively ruled out. Finally, we show that transfers are quite robust to revisions in the underlying export data. JEL Classification: E32, E62, E63

Suggested Citation

  • Beetsma, Roel & Cima, Simone & Cimadomo, Jacopo, 2018. "A minimal moral hazard central stabilisation capacity for the EMU based on world trade," Working Paper Series 2137, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182137
    Note: 352854
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    References listed on IDEAS

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    1. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    2. European Fiscal Board (EFB), 2020. "2020 annual report of the European Fiscal Board," Annual reports 2020, European Fiscal Board.
    3. Cimadomo, Jacopo & Ciminelli, Gabriele & Furtuna, Oana & Giuliodori, Massimo, 2020. "Private and public risk sharing in the euro area," European Economic Review, Elsevier, vol. 121(C).
    4. Massimo Amato & Everardo Belloni & Paolo Falbo & Lucio Gobbi, 2021. "Europe, public debts, and safe assets: the scope for a European Debt Agency," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(3), pages 823-861, October.
    5. Olga Francová & Ermal Hitaj & John Goossen & Robert Kraemer & Andreja Lenarčič & Georgios Palaiodimos, 2021. "EU fiscal rules: reform considerations," Discussion Papers 17, European Stability Mechanism, revised 25 Oct 2021.

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    More about this item

    Keywords

    central fiscal capacity; EMU; exports; moral hazard;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal 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; Treasury Policy

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