The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?

By Davide Furceri, Aleksandra Zdzienicka

September 25, 2013

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Format: Chicago

Davide Furceri, and Aleksandra Zdzienicka. The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?, (USA: International Monetary Fund, 2013) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The aim of this paper is to assess the effectiveness of risk sharing mechanisms in the euro area and whether a supranational fiscal risk sharing mechanism could insure countries against very severe downturns. Using an unbalanced panel of 15 euro area countries over the period 1979-2010, the results of the paper show that: (i) the effectiveness of risk sharing mechanisms in the euro area is significantly lower than in existing federations (such as the U.S. and Germany) and (ii) it falls sharply in severe downturns just when it is needed most; (iii) a supranational fiscal stabilization mechanism, financed by a relatively small contribution, would be able to fully insure euro area countries against very severe, persistent and unanticipated downturns.

Subject: Consumption, Credit, Financial crises, Fiscal policy, Fiscal union, Income, Money, National accounts

Keywords: Consumption, Consumption smoothing, Credit, Euro area country, Euro area crisis, Euro area member, Fiscal union, GDP shock, Income, Risk sharing, Severe downturn, Stabilization fund, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/198
Stock No:

WPIEA2013198
ISBN:

9781484334201
ISSN:

1018-5941

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