Debt Crises and Risk‐Sharing: The Role of Markets versus Sovereigns

Kalemli‐Özcan, Ṣebnem; Luttini, Emiliano; Sørensen, Bent E.

doi:10.1111/sjoe.12043

Cited by 53 publications

(22 citation statements)

References 30 publications

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“…8(2), [106][107][108][109][110][111][112][113][114]2019 In this article, we calculate the degree of public and private risk-sharing in the Economic and Monetary Union (EMU). In this sense, this paper is close to the literature measuring risk-sharing from an international perspective, such as Afonso and Furceri (2008), Kalemli-Ozcan et al (2014), Furceri and Zdzienicka (2015), Alcidi and Thirion (2016) and Poncela et al (2016). Similar to these studies, we conclude that public risk-sharing is low in the EMU, while private risk-sharing is skewed towards bank credit.…”

Section: Introductionsupporting

confidence: 69%

“…The chart shows that the strength of the risk-sharing mechanisms in the EA countries is rather limited, compared with the United States (see also Kalemli-Ozcan et al (2014); Alcidi and Thirion (2016); Furceri and Zdzienicka (2015) and Poncela et al (2016)). It is remarkable that the non-smoothed shock (the yellow bar) has been stable around 40% to 60%, close to the estimates in Afonso and Furceri (2008).…”

Section: Resultsmentioning

confidence: 99%

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Towards a more resilient euro area

Gordo

Kataryniuk

2019

Econ Bus Lett

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The euro area has shown lower capacity to resist shocks than other monetary unions, such as the US. One possible determinant is the lack of risk-sharing mechanisms. In this article, we estimate the risk-sharing capacity of the Euro Area according to the Asdrubali et al. (1996) methodology. The results show that the degree of risk-sharing is low in the euro area, in particular, due to underdeveloped capital markets and the lack of a central fiscal capacity. We suggest venues of reform to increase the economic resilience of the common currency area.

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Section: Introductionsupporting

confidence: 69%

Section: Resultsmentioning

confidence: 99%

Towards a more resilient euro area

Gordo

Kataryniuk

2019

Econ Bus Lett

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“…Curious enough, Greece, Portugal and Spain (jointly with Ireland and Italy that also have significant factor loadings of the same sign) constitute the so called PIIGS group, peripheral European countries where risk sharing has collapsed during the last recession and subsequent sovereign debt crisis. Kalemki-Ozcan et al (2014) point out that the governments of these countries did not save during the expansionary phases of the business cycle and were not able to borrow on the international markets during the crisis due to the high levels of outstanding public debt. Ireland is also included in this set although its case is slightly different, with government deficits related to banking failures; see Kalemki-Ozcan et al (2014).…”

Section: Empirical Analysismentioning

confidence: 99%

“…Kalemki-Ozcan et al (2014) point out that the governments of these countries did not save during the expansionary phases of the business cycle and were not able to borrow on the international markets during the crisis due to the high levels of outstanding public debt. Ireland is also included in this set although its case is slightly different, with government deficits related to banking failures; see Kalemki-Ozcan et al (2014). This might be the reason why Ireland is included in this group instead of within the Anglo-Saxon countries.…”

Section: Empirical Analysismentioning

confidence: 99%

Estimating Non-stationary Common Factors: Implications for Risk Sharing

2018

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In this paper, we analyze and compare the finite sample properties of alternative factor extraction procedures in the context of non-stationary Dynamic Factor Models (DFMs). On top of considering procedures already available in the literature, we extend the hybrid method based on the combination of principal components and Kalman filter and smoothing algorithms to non-stationary models. We show that if the idiosyncratic noises are stationary, procedures based on extracting the factors using the non-stationary original series work better than those based on differenced variables. We apply the methodology to the analysis of cross-border risk sharing by fitting nonstationary DFM to aggregate Gross Domestic Product and consumption of a set of 21 industrialized countries from the Organization for Economic Cooperation and Development (OECD). The goal is to check if international risk sharing is a short-or long-run issue. Keywords Consumption smoothing • Non-stationary Dynamic Factor Models • Kalman filter • Principal components • Risk sharing Financial support from the Spanish Government Projects ECO2015-70331-C2-1-R and ECO2015-70331-C2-2-R (MINECO/FEDER) is gratefully acknowledged. This paper was started while Pilar Poncela was still at Universidad Autónoma de Madrid. We are very grateful for the detailed comments of an anonymous referee which have been very useful to improve the presentation of this paper. The views expressed in this paper are those of the authors and should not be attributed neither to the European Commission nor to INEGI.

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“…The most striking difference between the US and EMU is the very low degree of risk-sharing via capital markets (i.e. international factor income) in EMU compared to the US (between 0-10% in the Eurozone vs. almost 40% in the US) (Kalemli-Ozcan et al, 2014). Alleviating of negative shocks in the euro area occurs mainly through the credit channel: cross-border saving and borrowing.…”

Section: Theoretical Approach To Fiscal Integration Within the Euro Areamentioning

confidence: 99%

Designing a fiscal union for the euro area

Kąkol

2017

EiP

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Motivation: Fiscal integration constitutes an important adjustment mechanism to cope with asymmetric shocks within a monetary union which does not fulfil many criteria of an optimal currency area. As is currently the case in the euro area, national governments implement discretionary fiscal policy to try to cope with the adverse economic shocks themselves and to try to stabilise income which leads to high budget deficits and public indebtedness in many euro area countries. While conducting fiscal policy at supranational level and fiscal transfers within EMU would allow for sufficient cross-country risk sharing and contribute to macroeconomic stability of the whole euro area. Aim: The aim of the paper is to give economic rationale and explain the significance of fiscal union for the effective functioning of a common currency area, and especially its macroeconomic stability as well as to present various forms of fiscal integration and to assess the possibility of their introduction within the euro area taking into account the current degree of economic integration, principles of conducting macroeconomic policy and its outcomes, the actual situation in the field of public finances and political circumstances in EMU and its member countries. Results: The greatest potential for macroeconomic stability -both in terms of asymmetric shocks, as well as these affecting the entire euro area -ensures the establishment of a large federal Eurozone budget. However, in a situation of a lack of political will to move forward into a political union, the approach to ensure fiscal stabilisation should include: creating even a small euro area-wide budget and the common Ministry of Finance, introducing a European unemployment (re-)insurance scheme with further harmonization of labour markets, equipping the banking union with a fiscal backstop as well as making national fiscal policies more stabilising and avoiding to impose self-defeating fiscal adjustments on crisis countries.

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Debt Crises and Risk‐Sharing: The Role of Markets versus Sovereigns

Cited by 53 publications

References 30 publications

Towards a more resilient euro area

Towards a more resilient euro area

Estimating Non-stationary Common Factors: Implications for Risk Sharing

Designing a fiscal union for the euro area

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