https://macropaperwarehouse.com/authors/ramon-marimon/Ramon MarimonHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/on-the-optimal-design-of-a-financial-stability-fund/https://macropaperwarehouse.com/papers/on-the-optimal-design-of-a-financial-stability-fund/<p><strong>Research Question</strong></p> <p>This paper asks how to optimally design a Financial Stability Fund (Fund) for a union of sovereign countries that must simultaneously (i) prevent sovereign default, (ii) provide risk-sharing and consumption smoothing, (iii) respect countries&rsquo; sovereignty (limited enforcement on both sides), (iv) address moral hazard from governments&rsquo; non-contractable policy reform effort, and (v) never impose permanent transfers or incur undesired expected losses. The paper develops the formal theory of such a Fund and evaluates it quantitatively against an incomplete-markets economy with sovereign default (IMD), calibrated to euro area &ldquo;stressed countries&rdquo; (Greece, Italy, Portugal, Spain — the GIPS).</p>