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© 2021 International Monetary Fund
WP/21/191
IMF Working Paper
Western Hemisphere Department
Pooling Fiscal Risk in the ECCU: Quantitative Assessment of Savings with a Regional Stabilization Fund
Prepared by Alejandro Guerson
Authorized for distribution by Sònia Muñoz
July 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
This paper quantifies the savings obtained from risk pooling with a Regional Stabilization Fund (RSF) for the Eastern Caribbean Currency Union. A Monte Carlo experiment is used to estimate the size of a RSF conditional on probabilities of depletion under specific saving-withdrawal rules. Results indicate that regional risk pooling requires about half of the saving amount relative to the sum of individual-country savings. In addition to reducing the amount of saving requirements for stabilization, the RSF can improve welfare by realocating government consumption savings during booms towards public investment during recessions, resulting in an increase of public investment in the range of 0.5–1.5 percent of GDP per year depending on the country, with positive growth dividends. Moreover, the RSF also reduces the dispersion of public debt outcomes in light of the cross-country cyclical synchronicity of output and revenue, thereby strengthening the stability of the regional currency board .
JEL Classification Numbers: C6; G18; H6.
Keywords: Natural disasters; ECCU; fiscal cycles; Monte Carlo experiment, debt sustainability, risk pooling.
Author’s E-Mail Address: aguerson@imf.org.
Contents
I. INTRODUCTION
II. METHODOLOGY
III. CALIBRATION
IV. RESULTS
A. Pro-cyclicality of Government Spending
B. Regional Savings of Risk Pooling
V. CONCLUDING REMARKS
REFERENCES
APPENDIX: NATIONAL SAVING FUND SIMULATIONS