We measure the amount of income insurance and cross-sectional consumption smoothing (lending and borrowing) achieved within subgroups of states, such as regions or clubs, e.g. the club of rich states. We find that there is as much income insurance between, as well as within, regions. By contrast, consumption smoothing occurs mainly within regions but not between regions, suggesting that capital markets transcend regional barriers while credit markets are regional in their nature. Smoothing within the club of rich states is accomplished mainly via capital markets whereas consumption smoothing is dominant within the club of poor states. The fraction of a shock to gross state product smoothed by the federal tax-transfer system is the same for various regions and other clubs of states. We calculate the scope for consumption smoothing within various regions and clubs, finding that most gains from risk sharing can be achieved within US regions. Since a considerable fraction of shocks to gross state product are smoothed within regions, we conclude that existing markets achieve a substantial fraction of the potential welfare gains from interstate income and consumption smoothing. Nonetheless, non-negligible welfare gains may be obtained from further improvement of risk sharing institutions.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1670.
Find related papers by JEL classification: D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration G15 - Financial Economics - - General Financial Markets - - - International Financial Markets R50 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - General
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