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Income and Consumption Smoothing among US States: Regions or Clubs?

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Author Info

  • Bent E. Sørensen

    (Brown University)

  • Oved Yosha

    (Tel-Aviv University)

Abstract

We quantify the amount of cross-sectional income and consumption smoothing achieved within subgroups of states, such as regions or clubs, e.g. the club of rich states. We find that there is much income smoothing between as well as within regions. By contrast, consumption smoothing occurs mainly within regions but not between regions. This suggests 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 products 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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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 96-13.

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Length: 25 pages
Date of creation: Jun 1996
Date of revision:
Handle: RePEc:kud:kuiedp:9613

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Keywords: risk sharing; incomplete markets; welfare;

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Cited by:
  1. Hess, Gregory D. & Shin, Kwanho, 2010. "Understanding the Backus-Smith puzzle: It's the (nominal) exchange rate, stupid," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 169-180, February.
  2. Adriana Arreaza & Bent E. Sorensen & Oved Yosha, 1998. "Consumption Smoothing through Fiscal Policy in OECD and EU Countries," NBER Working Papers 6372, National Bureau of Economic Research, Inc.
  3. Herrmann, Sabine & Jochem, Axel, 2005. "Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area," Discussion Paper Series 1: Economic Studies 2005,32, Deutsche Bundesbank, Research Centre.
  4. Stafano Athanasoulis & Eric van Wincoop, 1998. "Risksharing within the United States: what have financial markets and fiscal federalism accomplished?," Research Paper 9808, Federal Reserve Bank of New York.
  5. Herrmann, Sabine & Jochem, Axel, 2003. "Die internationale Integration der Geldmärkte in den mittel- und osteuropäischen Beitrittsländern: Abweichungen von der gedeckten Zinsparität, Kapitalverkehrskontrollen und Ineffizienzen des Finan," Discussion Paper Series 1: Economic Studies 2003,07, Deutsche Bundesbank, Research Centre.

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