How to Limit the Moral Hazard Related to a European Stabilization Mechanism

Séverine Menguy ()
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Séverine Menguy: University of Paris X, Postal: EconomiX. Bureau K123, Batiment K, Universite de Paris X -Nanterre, 200, Avenue de la Republique, 92001 Nanterre Cedex, France

Journal of Economic Integration, 2010, vol. 25, 252-275

Abstract:

The paper studies the opportunity to introduce a centralized insurance mechanism in Europe. Indeed, in a monetary union, monetary policy can efficiently stabilize common shocks but it is much less usable in case of asymmetrical shocks and /or if the countries are structurally heterogeneous. Thus, the national and decentralized stabilization policies could be efficiently complemented by a global insurance mechanism. Indeed, introducing state dependent federal transfers is beneficial if the variance of demand or supply shocks is sufficiently high in comparison with the disincentive effect of these transfers on the national effort to reduce the variance of idiosyncratic shocks. Nevertheless, a state independent federal premium would then also be useful in order to avoid the moral hazard problem implied by a centralized insurance mechanism.

Keywords: Economic and Monetary Union; Fiscal Federalism; Stabilization policy; Insurance Mechanism (search for similar items in EconPapers)
JEL-codes: E63 H61 H77 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0504

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