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Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community

Juergen von Hagen () and George Hammond ()

The Manchester School of Economic & Social Studies, 1998, vol. 66, issue 3, 331-53

Abstract: The loss of the exchange rate as an independent policy instrument implied by European monetary union calls for an insurance scheme as a buffer against asymmetric shocks. The authors study the performance of such a system using historical data. A reasonable insurance scheme can be implemented on the basis of a fairly complex econometric formula. Simplifying the computation of the transfers severely worsens the performance of the system. Forcing the system to balance financially is not a critical constraint. The simulations show that stabilizing asymmetric shocks around a common trend may amplify the univariate variance of GDP for some member countries. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1998
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Handle: RePEc:bla:manch2:v:66:y:1998:i:3:p:331-53