Working Paper: CEPR ID: DP14220
Authors: Joseba Martinez; Thomas Philippon; Markus Sihvonen
Abstract: We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a banking union; a capital market union; and complete financial markets. We show that a banking union is efficient at sharing all domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). Using a calibrated model we provide evidence of substantial welfare gains from a banking union and, in the presence of supply shocks, from a capital market union.
Keywords: risk sharing; currency union; banking union; capital market union; incomplete markets
JEL Codes: F45; E44; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking union (F36) | Efficient sharing of domestic demand shocks (F62) |
| Domestic demand shocks (public or private deleveraging) (D12) | Efficient sharing of domestic demand shocks (F62) |
| Capital market union (G10) | Necessary for sharing supply shocks (F41) |
| Supply shocks (productivity and quality shocks) (L15) | Necessary for sharing supply shocks (F41) |
| Banking union (F36) | Cannot share supply shocks (D39) |
| Improved risk sharing (G52) | Increased stability and welfare for both savers and borrowers (G21) |