Channels of Interstate Risk Sharing: United States 1963-1990

Abstract

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Endogeneity and Specialization in the European Monetary Union

“…However, the role of financial markets in this respect became ambiguous after the outbreak of the 2008 global financial crisis [Marciniak, 2010], which shows that financial market integration may also cause shocks to spread, or be reinforced, across countries. The role of fiscal policy in smoothing asymmetric shocks is significant, and has been subject to detailed analysis also by Asdrubali et al [1996], Kalemli-Ozcan et al [1999 and Marinheiro [2003]. Fiscal policies can indeed smooth shocks but, if uncoordinated, they can also generate them.…”

“…Since individuals prefer a relatively steady amount of consumption over time, they will hedge against the risk of a drop in consumption from asymmetric shocks hitting their regional economies. This hedge is effectuated through purchases of bonds, stocks and derivative instruments that embody claims on the assets and revenue of other businesses, or by smoothing private consumption inter-temporarily by saving or investing (see: Asdrubali et al [1996], Kalemli-Ozcan et al [1999,2004] and Marinheiro [2003]). …”

“…According to i.a. Asdrubali et al [1996], Kalemli-Ozcan et al [1999,2004] and Marinheiro [2003], financial markets may significantly buffer such asymmetric shocks if they are highly integrated. However, the role of financial markets in this respect became ambiguous after the outbreak of the 2008 global financial crisis [Marciniak, 2010], which shows that financial market integration may also cause shocks to spread, or be reinforced, across countries.…”

“…International risk sharing refers i.a. to the role of financial markets (development and integration), fiscal policies, and individuals in cushioning asymmetric shocks occurring between countries in monetary unions (for more details see: Asdrubali et al [1996], Kalemli-Ozcan et al [1999 and Marinheiro [2003]). Adjustment to occurring shocks through the above-mentioned channels is considered a cost of the monetary union.…”

Fiscal Equalization in Europe – Introduction

“…The model is augmented with a fiscal capacity which provides budgetary support in the case of adverse cyclical shocks. To assess the contribution of these automated transfers the paper employs a decomposition of total consumption smoothing following Asdrubali et al (1996). While horizontal transfers are found to enhance the fiscal space of the governments, as emphasized by proponents of a European Fiscal Union, the results point to a significant crowding-out of alternative risk sharing channels.…”