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Channels of risk-sharing among Canadian provinces: 1961–2006

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Author Info
Balli, Faruk
Basher, Syed
Louis, Rosmy

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Abstract

This paper incorporates recent developments in the literature to quantify the channels and the associated determinants of risk-sharing among Canadian provinces. We find that 40 percent of shocks to gross provincial product are smoothed by capital markets, 25 percent are smoothed by the federal government, and 16 percent are smoothed by credit markets. The remaining 19 percent are not smoothed. Our decomposition of federal government smoothing shows that transfers to provincial and local governments constitute a major part of smoothing. Our estimates reveal that the series of postwar Bank Act revisions facilitated the working of capital market smoothing over time. We also conduct an investigation understanding why the credit market smoothing has declined over time. Finally, we introduce a new dimension in the analysis of risk-sharing by conducting a pairwise risk-sharing approach. The pairwise results present numerous micro findings that can help decision makers in formulating policies to remedy the weak links of incomplete risk-sharing.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15206.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:15206

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Related research
Keywords: Risk-sharing; consumption smoothing; federal taxes and transfer; pairwise approach.;

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Find related papers by JEL classification:
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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  4. Elizabeth Wakerly & Byron Scott & James Nason, 2006. "Common trends and common cycles in Canada: who knew so much has been going on?," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 320-347, February. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!]
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  12. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 507-22, August. [Downloadable!] (restricted)
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  15. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, vol. 45(2), pages 211-238, August. [Downloadable!] (restricted)
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  16. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 631-53, October. [Downloadable!] (restricted)
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  17. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
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  22. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October. [Downloadable!] (restricted)
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