Working Paper: CEPR ID: DP2154
Authors: Jacques Melitz; Frédéric Zumer
Abstract: How much risk sharing takes place between regions within countries, between countries internationally, and what are the lessons for EMU? We study these questions based on regional data from the US, Canada, the UK and Italy, and national data from an international sample of 23 OECD countries, including all 15 EU members, and do so with the aid of a modified version of a model by Asdrubali, Sørensen and Yosha. In conclusion, we find that even though the surrender of monetary policy will reduce the capacity of the members of EMU to smooth shocks via macroeconomic policy, the regime will promote smoothing of shocks via market channels.
Keywords: risk sharing; insurance and credit; fiscal federalism; EMU
JEL Codes: C33; E20; F20; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insurance (G52) | Smoothing of regional shocks (R11) |
| Credit (G21) | Smoothing of regional shocks (R11) |
| Credit (G21) | Interregional risk sharing (F16) |
| Insurance (G52) | Interregional risk sharing (F16) |
| Openness (O36) | Risk sharing via insurance (G52) |
| Openness (O36) | Risk sharing via credit (G21) |
| Central government transfers (H77) | Regional stabilization (C62) |
| Surrender of monetary policy under EMU (E58) | Market-based shock smoothing (C51) |
| Market mechanisms (D47) | Aggregate smoothing capacity (E23) |