Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233531 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
EconPol Policy Report No. 28
Publisher: 
ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Munich
Abstract: 
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.
Document Type: 
Research Report

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