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Private and public risk sharing in the euro area

Author

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  • Cimadomo, Jacopo
  • Ciminelli, Gabriele
  • Furtuna, Oana
  • Giuliodori, Massimo

Abstract

This paper investigates the contribution of private and public channels for consumption risk sharing in the euro area. In particular, it explores the role of financial integration versus official financial assistance for consumption smoothing. In addition, it presents a time-varying test which allows estimating how risk sharing has evolved since the start of the euro, including the recent great recession and European sovereign debt crisis. Our results suggest that, whereas in the early years of the euro only about a third of country-specific output shocks were smoothed, in the aftermath of the crisis almost 60% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This improvement was mostly due to a higher degree of financial integration, as reflected in particular in cross-border portfolio holdings of corporate and government bonds. Importantly, the provision of official loans to distressed governments in the wake of the crisis considerably improved risk sharing since 2010.

Suggested Citation

  • Cimadomo, Jacopo & Ciminelli, Gabriele & Furtuna, Oana & Giuliodori, Massimo, 2020. "Private and public risk sharing in the euro area," European Economic Review, Elsevier, vol. 121(C).
  • Handle: RePEc:eee:eecrev:v:121:y:2020:i:c:s0014292119302077
    DOI: 10.1016/j.euroecorev.2019.103347
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    1. Euro Area in the Age of COVID-19
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2020-05-17 11:53:03

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    More about this item

    Keywords

    Risk sharing; Time-variation; Euro area; Financial integration; Official financial assistance;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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