Working Paper: CEPR ID: DP4463
Authors: Sebnem Kalemli-Ozcan; Bent E. Sørensen; Oved Yosha
Abstract: We find that risk sharing in the European Union (EU) has been increasing over the past decade due to increased cross-ownership of assets across countries. Industrial specialization has also been increasing over the last decade and we conjecture that risk sharing plays an important causal effect by allowing countries to specialize without being subject to higher income risk even though the variability of output may increase. We believe that lower trade barriers may not have played a dominant causal role during this decade because the effect of lower trade barriers has probably already played itself out. We further find that the asymmetry of GDP fluctuations in the EU has declined steeply over the last two decades. This may be due to economic policies becoming more similar as countries were adjusting fiscal policy in order to meet the Maastricht criteria; however, a similar result was found for US states so the finding may be due to a different nature of the shocks to the world economy in the 1990s. We expect to see a further rise in risk sharing between EU countries, accompanied by more specialization. The resulting increase in GDP asymmetry should be minor, however, and will have small welfare costs because increased risk sharing should lower income (GNP) asymmetry.
Keywords: Financial Integration; Income Insurance; International Portfolio Diversification; Regional Specialization
JEL Codes: F15; F20; F36; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk sharing (D16) | specialization (Z00) |
| fiscal policies (H30) | GDP asymmetry (F62) |
| risk sharing (D16) | income volatility (D31) |
| GDP fluctuations (F44) | GNP fluctuations (F44) |
| risk sharing (D16) | income asymmetry (D31) |