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Regional Insurance Against Asymmetric Shocks: An Empirical Study for the European Community
Author(s) -
Hagen Jürgen von,
Hammond George W.
Publication year - 1998
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00104
Subject(s) - economics , constraint (computer aided design) , univariate , econometrics , variance (accounting) , balance (ability) , exchange rate , forcing (mathematics) , macroeconomics , monetary economics , multivariate statistics , statistics , mathematics , medicine , mathematical analysis , geometry , accounting , physical medicine and rehabilitation
The loss of the exchange rate as an independent policy insrument implied by European monetary union calls for an insurance scheme as a buffer against asymmetric shocks. We 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.