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Risksharing within the United States: what have financial markets and fiscal federalism accomplished?

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  • Stafano Athanasoulis
  • Eric van Wincoop

Abstract

We document aggregate income growth uncertainty at the state level, and the extent to which this uncertainty is reduced by risksharing through financial markets and federal fiscal policy. A methodology is adopted that is closely connected to the empirical growth literature. It does not rely on assumptions about a model or stochastic process of income. This is important because estimated gains from international risksharing have been found to be very sensitive to the assumed model or income process. We only make assumptions about the information set used to predict growth, which is sufficient (and necessary) to compute income growth uncertainty. Estimates of growth uncertainty for a representative state are obtained at horizons from one to twenty-six years from panel regressions of state income growth, in deviation from national growth, on variables in the information set. This "residual risk" can be fully diversified at a zero risk premium. We show that potential welfare gains from risksharing depend on a weighted average of the variance of residual risk at different horizons. Three measures of income are considered: gross state product, pre-tax state income, and disposable state income. The differences between the first two is associated with financial markets (net asset income), while the difference between the last two is associated with federal fiscal policy (federal taxes and transfers). At a 26-year horizon we find that 71% of potential welfare gains from risksharing have already been achieved; 60% through financial markets and 11% through federal fiscal policy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9808.

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Date of creation: 1998
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Handle: RePEc:fip:fednrp:9808

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Keywords: Fiscal policy ; Risk ; Financial markets;

References

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Citations

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Cited by:
  1. Sebnem Kalemi-Ozcan & Bent E. Sorensen & Oved Yosha, 2000. "Risk Sharing and Sectoral Specialization: Regional and International Evidence," Econometric Society World Congress 2000 Contributed Papers 1582, Econometric Society.
  2. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
  3. Basher, Syed A. & Balli, Faruk & Louis, Rosmy, 2009. "Channels of risk-sharing among Canadian provinces: 1961–2006," MPRA Paper 17300, University Library of Munich, Germany.
  4. Zahir, Antia & Djoudad, Ramdane & St-Amant, Pierre, 1999. "Canada’s Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms," Working Papers 99-17, Bank of Canada.
  5. Davide Furceri, 2002. "Risk-sharing e architettura istituzionale delle politiche di stabilizzazione nell'UME: aspetti metodologici e verifica empirica," Rivista di Politica Economica, SIPI Spa, vol. 92(6), pages 175-210, November-.
  6. Gregory D. Hess & Kwanho Shin, 1997. "Risk sharing by households within and across regions and industries," Research Working Paper 97-07, Federal Reserve Bank of Kansas City.
  7. Sebnem Kalemli-Ozcan & Bent E. S�rensen & Oved Yosha, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," Working Papers 99-16, Brown University, Department of Economics.
  8. Del Negro, Marco, 2002. "Asymmetric shocks among U.S. states," Journal of International Economics, Elsevier, vol. 56(2), pages 273-297, March.
  9. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
  10. Hanno Lustig & Stijn Van Nieuwerburgh, 2004. "How Much Does Household Collateral Constrain Regional Risk Sharing?," NBER Working Papers 10505, National Bureau of Economic Research, Inc.
  11. Ortuno-Ortin, Ignacio & Sempere, Jaume, 2006. "A theoretical model of nations, regions and fiscal integration," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 132-157, January.
  12. Konrad Szelag, 2008. "A Single Fiscal Policy in the Euro Area: Vision or Utopia?," National Bank of Poland Working Papers 46, National Bank of Poland, Economic Institute.

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