On the optimal design of a financial stability fund
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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.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
- dc.date.accessioned 2024-11-14T10:10:14Z
- dc.date.available 2024-11-14T10:10:14Z
- dc.date.issued 2022-03-01
- dc.date.modified 2024-11-14T10:08:31Z
- dc.description.abstract We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These 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 as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area 'stressed countries', substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries defaultable sovereign debts into union s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund.
- dc.format.mimetype application/pdf*
- dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=1827
- dc.identifier.citation
- dc.identifier.uri http://hdl.handle.net/10230/68682
- dc.language.iso eng
- dc.relation.ispartofseries Economics and Business Working Papers Series; 1827
- dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
- dc.rights.accessRights info:eu-repo/semantics/openAccess
- dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
- dc.subject.keyword fiscal unions
- dc.subject.keyword recursive contracts
- dc.subject.keyword debt contracts
- dc.subject.keyword partnerships
- dc.subject.keyword limited enforcement
- dc.subject.keyword moral hazard
- dc.subject.keyword debt restructuring
- dc.subject.keyword debt overhang
- dc.subject.keyword sovereign fund
- dc.subject.keyword Macroeconomics and International Economics
- dc.title On the optimal design of a financial stability fund
- dc.title.alternative
- dc.type info:eu-repo/semantics/workingPaper