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dc.contributor.author Ábrahám, Árpád
dc.contributor.author Cárceles Poveda, Eva
dc.contributor.author Liu, Yan
dc.contributor.author Marimon, Ramon
dc.date.accessioned 2018-09-19T16:46:52Z
dc.date.available 2018-09-19T16:46:52Z
dc.date.issued 2018-04
dc.identifier.uri http://hdl.handle.net/10230/35473
dc.description.abstract A Financial Stability Fund set by a union of sovereign countries can improve countries' ability to share risks, borrow and lend, with respect to the standard instrument used to smooth fluctuations: sovereign debt financing. Efficiency gains arise from the ability of the fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints. In contrast, standard sovereign debt contracts are uncontingent and subject to untimely debt roll-overs and default risk. We develop a model of the Financial Stability Fund (Fund) as a long-term partnership with LE and MH constraints. We quantitatively compare the constrained-efficient Fund economy with the incomplete markets economy with default. In particular, we characterize how (implicit) interest rates and asset holdings differ, as well as how both economies react differently to the same productivity and government expenditure shocks. In our economies, `calibrated' to the euro area `stressed countries' , substantial effciency gains are achieved by establishing a well-designed Financial Stability Fund; this is particularly true in times of crisis. Our theory provides a basis for the design of a Fund - for example, beyond the current scope of the European Stability Mechanism (ESM) - and a theoretical and quantitative framework to assess alternative risk-sharing (shock-absorbing) facilities, as well as proposals to deal with the euro area `debt overhang problem'.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries ADEMU Working Paper Series;105
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri https://creativecommons.org/licenses/by/4.0/
dc.subject.other Recursive contracts
dc.subject.other Debt contracts
dc.subject.other Partnerships
dc.subject.other Limited enforcement
dc.subject.other Moral hazard
dc.subject.other Debt restructuring
dc.subject.other Debt overhang
dc.subject.other Sovereign funds
dc.title On the optimal design of a financial stability fund
dc.type info:eu-repo/semantics/workingPaper
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess

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