The case for a loan-based euro area stability fund

Florian Misch and Martin Rey
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Martin Rey: ESM

Discussion Papers from European Stability Mechanism

Abstract: A greater likelihood of significant asymmetric shocks, the war in Ukraine, and stretched fiscal space all underscore the importance of establishing a euro area fiscal stabilisation capacity. This paper considers the merits of a fund that provides loans for fiscal stabilisation purposes, referred to as ‘stability fund’. First, we argue that this fund could better address moral hazard and be more easily set up than other proposed schemes. Second, using quarterly data from two decades, we model eligibility and the authorities’ decision to request loans to simulate the loan portfolio of this fund had it existed all along, with the loan parameters calibrated to match what the ESM could provide. The results suggest the ESM’s current lending capacity is sufficient to host this fund, and that the expansion of fiscal space can be macroeconomically significant and larger compared to other fiscal stabilisation capacity types.

Pages: 32
Date: 2022-05-05, Revised 2022-05-05
New Economics Papers: this item is included in nep-ban, nep-cis, nep-eec and nep-mac
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:stm:dpaper:20

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