Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets

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


Causal Claims Network Graph

Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.


Causal Claims

CauseEffect
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)

Back to index