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Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community

George Hammond () and Juergen von Hagen ()

No 1170, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The loss of the exchange rate as an independent policy instrument implied by EMU has spurred calls for an insurance scheme as a buffer against temporary, asymmetric shocks to national income. We study the potential properties of such a system using historical data from the 12 EC economies. An insurance scheme with reasonable properties 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, however. 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.

Keywords: Business Cycles; Fiscal Federalism; Monetary Union; Stabilization Policy (search for similar items in EconPapers)
JEL-codes: E32 E52 E63 F42 (search for similar items in EconPapers)
Date: 1995-05
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Related works:
Journal Article: Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community (1998)
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