A Central Fiscal Stabilization Capacity for the Euro Area

By Nathaniel G Arnold, Bergljot B Barkbu, H. Elif Ture, Hou Wang, Jiaxiong Yao

March 26, 2018

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Nathaniel G Arnold, Bergljot B Barkbu, H. Elif Ture, Hou Wang, and Jiaxiong Yao. A Central Fiscal Stabilization Capacity for the Euro Area, (USA: International Monetary Fund, 2018) accessed November 21, 2024

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Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Summary

This note outlines a concrete proposal for a euro area central fiscal capacity (CFC) that could help smooth both country-specific and common shocks. Specifically, it proposes a macroeconomic stabilization fund financed by annual contributions from countries that are used to build up assets in good times and make transfers to countries in bad times, as well as a borrowing capacity in case an exceptionally large shock exhausts the fund’s assets. To address moral hazard risks, transfers from the CFC—beyond a country’s own net contributions—would be conditional on compliance with the EU fiscal rules. The note also discusses several features aimed at avoiding permanent transfers between countries and making the CFC function as automatically as possible—to limit the scope for disputes over its operation—both of which are important points to make it politically acceptable.

Subject: Financial sector policy and analysis, Fiscal policy, Fiscal rules, Fiscal stabilization, Labor, National accounts, Output gap, Production, Return on investment, Stress testing, Unemployment rate

Keywords: Aggregate CFC contribution target, Asset target, Calibrating contribution, CFC asset, CFC assets, CFC proposal, CFC transfer, Debt group, Deviation trigger, Euro Area, Fiscal Integration, Fiscal rules, Fiscal stabilization, Global, Inflation impact, Macroeconomic Stabilization, Moving average, Output gap, Return on investment, SDN, Shock scenario, Stabilization power, Stress testing, Trend unemployment rate, Unemployment rate, Usage premium

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Staff Discussion Notes No. 2018/003
Stock No:

SDNEA2018003
ISBN:

9781484348178
ISSN:

2617-6750

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