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Output Smoothing in EMU and OECD: Can We Forego Government Contribution? A risk sharing approach

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  • Carlos Marinheiro

    ()
    (GEMF and Faculdade de Economia, Universidade de Coimbra)

Abstract

This paper analyses the smoothing of asymmetric shocks to output for a sample of OECD countries. The research finds no evidence of large differences in the patterns of risk sharing for the 19 OECD countries, the EU-15 or euro-area countries, for the period 1970-1999. However, there were shown to be considerable differences between the euro-area and the successful monetary union of the USA: the euro-area showed a much lower insurance of asymmetric shocks than the US states. In the US federation, 75% of the asymmetric shocks to output were smoothed in the period 1964-1990. However, in the euro-area only 44% of such shocks were not passed onto consumption in the period 1970-1999. Until increasing economic integration in Europe does not lead to a substantial decrease in the incidence of idiosyncratic shocks, such shocks may impose non-negligible welfare costs. Due to a large contribution from the public sector to risk sharing, especially to smooth out more persistent shocks, it does not seem likely that private capital markets can easily replace the government, in the near future, in providing a sufficient degree of risk sharing in the euro-area. Even if capital markets become as integrated in the euro-area as they were in the US federation in the period 1964-1990, the amount of shocks left unsmoothed will still be 1.8 times larger than in the US federation. As there are no substantial differences between the patterns of risk sharing for the different samples considered, an eventual enlargement of the euro-area to include the UK, Denmark and Sweden is not likely to pose additional risk sharing problems for the euro-zone.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2003-02.

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Length: 42 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:gmf:wpaper:2003-02

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Keywords: EMU; Output smoothing; Risk sharing; International capital markets; Economic integration;

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References

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  1. Melitz, Jacques & Zumer, Frederic, 1999. "Interregional and international risk-sharing and lessons for EMU," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 149-188, December.
  2. Michael J. Artis & Marco Buti, 2000. "Close to Balance or in Surplus. A Policy Maker’s Guide to the Implementation of the Stability and Growth Pact," EUI-RSCAS Working Papers 28, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  3. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
  4. Giovanni P. Olivei, 2000. "Consumption risk-sharing across G-7 countries," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 3-14.
  5. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  6. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
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Citations

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Cited by:
  1. Faruk Balli & Syed Abul Basherz & Rosmy Jean Louis, 2012. "Risk Sharing in the Middle East and North Africa: The Role of Remittances and Factor Incomes," CAMA Working Papers 2012-39, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Emil Stavrev, 2007. "Growth and Inflation Dispersions in EMU: Reasons, the Role of Adjustment Channels, and Policy Implications," IMF Working Papers 07/167, International Monetary Fund.
  3. Sampawende Jules Tapsoba, 2011. "Union Monétaire en Afrique de l'Ouest: Quelles Réponses à l'Hétérogénéité des Chocs ?," Working Papers halshs-00554309, HAL.
  4. Carlos Marinheiro, 2007. "The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe," GEMF Working Papers 2007-07, GEMF - Faculdade de Economia, Universidade de Coimbra.
  5. De Grauwe, Paul & Mongelli, Francesco Paolo, 2005. "Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?," Working Paper Series 0468, European Central Bank.

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