2026-04-14T06:05:18Zhttps://recercat.cat/oai/request

oai:recercat.cat:10230/354732025-12-19T01:44:11Zcom_2072_6col_2072_452953

00925njm 22002777a 4500 dc Ábrahám, Árpád author Cárceles Poveda, Eva author Liu, Yan author Marimon, Ramon author 2018-09-19T16:46:52Z 2018-09-19T16:46:52Z 2018-04 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'. The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. Recursive contracts Debt contracts Partnerships Limited enforcement Moral hazard Debt restructuring Debt overhang Sovereign funds On the optimal design of a financial stability fund