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Income insurance: a theoretical exercise with empirical application for the euro area

Author(s): Nicolas Carnot, Phil Evans, Serena Fatica, Gilles Mourre

Income insurance: a theoretical exercise with empirical application for the euro areapdf(753 kB) Choose translations of the previous link 

The recent crisis has shown how economic shocks can lead to considerable and persistent cyclical divergences in the euro area. Successful monetary unions have generally been backed by fiscal arrangements providing income insurance against shocks. This paper reviews the potential issues, the underlying trade-offs and the necessary theoretical conditions to make an income insurance scheme workable, and provides an empirical application for the euro area. It also discusses ‘good’ design features, arguing that such schemes should focus on large shocks and exert a moderating effect during boom times, as well as provide cushioning against adverse shocks.

(European Economy. Economic Papers 546. March 2015. Brussels. PDF. 84pp. Tab. Graph. Ann. Bibliogr. Free.)

KC-AI-15-546-EN-N (online)KC-AI-15-546-EN-C (print)
ISBN 978-92-79-44814-0 (online)ISBN 978-92-79-44815-7 (print)
doi: 10.2765/537291 (online)doi: 10.2765/931269 (print)

JEL classification: E61, E62, F36, F42, H77

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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