A Central Fiscal Stabilization Capacity for the Euro Area

Nathaniel Arnold, Bergljot Barkbu, H. Elif Ture, Hou Wang and Jiaxiong Yao

No 2018/003, IMF Staff Discussion Notes from International Monetary Fund

Abstract: 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.

Keywords: SDN; moving average; Euro Area; Fiscal Integration; Macroeconomic Stabilization; CFC transfer; debt group; asset target; CFC assets; shock scenario; trend unemployment rate; aggregate CFC contribution target; CFC asset; deviation trigger; stabilization power; Unemployment rate; Fiscal rules; Return on investment; Output gap; Fiscal stabilization; Global; CFC proposal; inflation impact; usage premium; calibrating contribution; Stress testing (search for similar items in EconPapers)
Pages: 57
Date: 2018-03-26
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Citations: View citations in EconPapers (44)

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