Jan Stráský, Guillaume Claveres, 28 January 2019

Calls to complement national automatic stabilisers and the ongoing financial integration in the euro area with a common fiscal instrument have provoked a mixed response. This column, part of the VoxEU debate on euro area reform, uses a dynamic stochastic general equilibrium model of the euro area to show that fiscal risk sharing brings an additional layer of stabilisation compared to national stabilisers, particularly when monetary policy is constrained by the effective lower bound. It also argues that an unemployment reinsurance scheme could be designed in such a way that it would benefit all members of the currency area and would not lead to permanent transfers among countries.

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