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

Davide Furceri and Aleksandra Zdzienicka (azdzienicka@imf.org)

Open Economies Review, 2015, vol. 26, issue 4, 683-710

Abstract: 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. Copyright Springer Science+Business Media New York 2015

Keywords: Risk sharing mechanisms; Consumption smoothing channels; Fiscal union; F41; F32; F36 (search for similar items in EconPapers)
Date: 2015
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Working Paper: The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism? (2013)
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DOI: 10.1007/s11079-015-9347-y

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