Working Paper: NBER ID: w26026
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: currency union; capital market union; risk sharing; banking union
JEL Codes: E5; F02; F3; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking Union (F36) | Improved Risk Sharing during Domestic Demand Shocks (F41) |
| Banking Union (F36) | Mitigation of Negative Impacts of Domestic Demand Shocks on Output and Employment (E69) |
| Capital Market Union (G10) | Efficient Risk Sharing during Supply Shocks (D52) |
| Banking Union cannot fully share risks associated with Supply Shocks (E44) | Necessity of Capital Market Union (G10) |
| Lack of Capital Market Union (G19) | Increased Consumption Volatility during Supply Shocks (D11) |
| Lack of Capital Market Union (G19) | Reduced Welfare during Supply Shocks (I38) |