Mimicking a Buffer Fund for the Eurozone

In this paper I examine how a Eurozone buffer fund could help bolster the stability of the Eurozone economy by mitigating the procyclicality of fiscal policies. Receipts from the buffer fund are assumed to be triggered by the cyclical movements in unemployment in each country. The receipts, in turn, are expected to mitigate the fiscal contractions during downturns. To quantify the extent of macroeconomic stabilisation thus achieved, the paper superimposes estimates for ‘fiscal multipliers’ on the assumed change in fiscal policies. The computations are carried out using two databases – the European Commission's AMECO database and the OECD Economic Outlook database – and suggest that a Eurozone buffer fund would have significant stabilisation properties.