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

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  • Martinez, Joseba
  • Sihvonen, Markus

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.

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  • Martinez, Joseba & Sihvonen, Markus, 2019. "Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets," CEPR Discussion Papers 14220, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14220
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    2. Hoffmann, Mathias & Okubo, Toshihiro, 2022. "‘By a silken thread’: Regional banking integration and credit reallocation during Japan's lost decade," Journal of International Economics, Elsevier, vol. 137(C).
    3. Jakub Danko & Erik Suchý, 2021. "The Financial Integration in the European Capital Market Using a Clustering Approach on Financial Data," Economies, MDPI, vol. 9(2), pages 1-19, June.

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    More about this item

    Keywords

    Risk sharing; Currency union; Banking union; Capital market union; Incomplete markets;
    All these keywords.

    JEL classification:

    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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