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Journal of Economic Integration 2010 June;25(2) :252-275.
DOI: https://doi.org/10.11130/jei.2010.25.2.252
How to Limit the Moral Hazard Related to a European Stabilization Mechanism
Séverine Menguy 
University of Paris X
Copyright ©2010 Journal of Economic Integration
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.

JEL Classification: E63, H61, H77

Keywords: Economic and Monetary Union | Fiscal Federalism | Stabilization policy | Insurance Mechanism
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