Pooling Fiscal Risk in the ECCU: Quantifying Savings of a Regional Fund for Stabilization and Investment
IMF Working Papers, July 16, 2021
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- Pooling Fiscal Risk in the ECCU: Quantifying Savings of a Regional Fund for Stabilization and Investment
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Bibliographic details
- Authors: Alejandro D Guerson
- Published: July 16, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513588827.001
Summary and objective
- Quantifies the savings obtained from risk pooling with a Regional Stabilization Fund (RSF) for the Eastern Caribbean Currency Union.
- Uses a Monte Carlo experiment to estimate the size of a RSF conditional on probabilities of depletion under specific saving-withdrawal rules.
- Aims to assess stabilization requirements, effects on public investment and debt dispersion, and implications for the stability of the regional currency board.
Methodology
- Analytical approach: Monte Carlo experiment.
- Scenarios evaluated: RSF sized to meet conditional probabilities of depletion under specified saving-withdrawal rules.
- Rules considered: saving-withdrawal rules and a saving-investment rule that allow reallocation of government consumption savings during booms toward public investment during recessions.
Key quantitative findings
- Regional risk pooling requires about half of the saving amount relative to the sum of individual-country savings.
- Public investment increases in the range of 0.5-1.5 percent of GDP per year depending on the country, with positive growth dividends.
- The RSF reduces the dispersion of public debt outcomes given cross-country cyclical synchronicity of output and revenue, thereby strengthening the stability of the regional currency board.
Policy implications and welfare effects
- Reduces overall saving requirements for stabilization through risk sharing across member countries.
- Improves welfare by reallocating government consumption savings accumulated during booms to public investment during recessions.
- Strengthens fiscal and currency-board stability by lowering cross-country dispersion in public debt trajectories.
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