One Scheme Fits All: A Central Fiscal Capacity for the Emu Targeting Eurozone, National and Regional Shocks

Abstract

This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shocks within a single scheme. Based on NUTS3 regional data over the last two decades, our analysis shows that - with a limited risk of moral hazard - substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were on average less severe and therefore needed less stabilisation.

Keywords: Central fiscal capacity, macroeconomic stabilisation, multilevel fac-tor model, Bayesian inference