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The insurance properties of common debt issuance. CEPS Policy Contribution 26 Nov 2020.

Gros, Daniel (2020) The insurance properties of common debt issuance. CEPS Policy Contribution 26 Nov 2020. [Policy Paper]

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    In a federation of sovereign states, common debt can provide insurance against idiosyncratic shocks even without any intended, ex ante transfers. This insurance property arises automatically when the common debt service is financed by a levy on members that is proportional to national income. This is the case in the EU. It implies that if the economy of a member state is hit by a negative shock, i.e., if it grows less than the Union average, its contribution to the service of the common debt is correspondingly reduced. By contrast, the service of national debt, which is typically fixed in nominal terms, becomes more difficult in the case of a negative idiosyncratic shock. Ceteris paribus, common debt issuance is thus akin to linking debt service to GDP growth. Uncertainty about growth increases with the time horizon. The insurance property of common debt thus increases with its maturity.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > economic policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Policy Contributions
    Depositing User: Daniel Pennell
    Official EU Document: No
    Language: English
    Date Deposited: 08 Mar 2021 09:29
    Number of Pages: 19
    Last Modified: 08 Mar 2021 09:29

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