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Is risk sharing in the United States a regional phenomenon?

Author

Listed:
  • Bent E. Sorensen
  • Oved Yosha

Abstract

Regions within the United States routinely experience economic fluctuations that differ from those of other regions. For example, in the past few years, falling wheat prices have slowed growth in the value of total output in Kansas. Such developments can pose concerns for policymakers because macroeconomic tools like monetary policy affect all regions, not just specific regions. Fortunately, several mechanisms help insulate regional income and consumption from region-specific output fluctuations. Diversification of asset ownership across regions, made possible by national capital markets, smoothes regional income and, in turn, consumption. The federal tax system also helps protect regional income and consumption from region- specific changes in output. Finally, adjustments to saving further insulate consumption from variation in output. In effect, each of these mechanisms mitigates the effect of region-specific economic fluctuations by pooling risks across regions--by providing risk sharing.> Although earlier research has documented the pattern of risk sharing for the United States as a whole, patterns may differ across broad regions of the nation. Eastern states, for example, may benefit more from income smoothing through capital markets due to their proximity to Wall Street. Moreover, geographic distance may affect whether and how risk is shared. For instance, it may be easier for Kansas residents to own property, such as a farm or hotel, in Colorado than in Massachusetts. Similarly, business owners in Kansas are more likely to obtain loans in Missouri than in New York. In this case, geography may affect the ability of risk sharing to mitigate region-specific fluctuations in output. Because geography matters, this article examines whether risk sharing occurs more in some regions than in others and whether risk sharing is greater within large regions of the United States than between regions.> Sorensen and Yosha present the conceptual framework of risk sharing and develop a method for estimating the amount of risk sharing provided by different mechanisms. They report estimates of risk sharing patterns within and across a set of large U.S. regions. These estimates reveal some important regional differences. Moreover, the estimates indicate there is more overall risk sharing within regions than between regions. The risk sharing provided by capital markets and the federal tax system is essentially the same within and across regions, implying that these are nationwide mechanisms. In contrast, risk sharing through saving adjustments is more local, occurring just within regions.

Suggested Citation

  • Bent E. Sorensen & Oved Yosha, 2000. "Is risk sharing in the United States a regional phenomenon?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 33-47.
  • Handle: RePEc:fip:fedker:y:2000:i:qii:p:33-47:n:v.85no.2
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    References listed on IDEAS

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    1. Bent E. S�rensen & Oved Yosha, 1998. "International Risk Sharing and European Monetary Unification," Temi di discussione (Economic working papers) 327, Bank of Italy, Economic Research and International Relations Area.
    2. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    3. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, pages 539-591.
    4. 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.
    5. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-956, October.
    6. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
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    Citations

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    Cited by:

    1. Asdrubali, Pierfederico & Kim, Soyoung, 2008. "On the empirics of international smoothing," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 374-381, March.
    2. Stefano Schiavo, 2008. "Financial Integration, GDP Correlation and the Endogeneity of Optimum Currency Areas," Economica, London School of Economics and Political Science, vol. 75(297), pages 168-189, February.
    3. Pierucci, Eleonora & Ventura, Luigi, 2012. "International risk sharing and globalization," MPRA Paper 35869, University Library of Munich, Germany.
    4. Li, Jia, 2012. "On the Empirics of China's Inter-regional Risk Sharing," MPRA Paper 37805, University Library of Munich, Germany.
    5. F. Pericoli & E. Pierucci & L. Ventura, 2015. "The impact of social capital on consumption insurance and income volatility in the UK: evidence from the British Household Panel Survey," Review of Economics of the Household, Springer, vol. 13(2), pages 269-295, June.
    6. Wagner, Gary A., 2003. "Are state budget stabilization funds only the illusion of savings?: Evidence from stationary panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 213-238.
    7. George M. Korniotis & Alok Kumar, 2008. "Do behavioral biases adversely affect the macro-economy?," Finance and Economics Discussion Series 2008-49, Board of Governors of the Federal Reserve System (U.S.).
    8. Faruk Balli & Eleonora Pierucci, 2015. "Globalization and international risk-sharing: do political and social factors matter more than economic integration?," CAMA Working Papers 2015-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. Jose Maria Casado, 2012. "Consumption partial insurance of Spanish households," Working Papers 1214, Banco de España;Working Papers Homepage.
    10. Kalemli-Ozcan, Sebnem & Sorensen, Bent E. & Yosha, Oved, 2001. "Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations," Journal of International Economics, Elsevier, vol. 55(1), pages 107-137, October.
    11. Sebnem Kalemli-Ozcan & Bent E. Sorensen & Oved Yosha, 1999. "Industrial specialization and the asymmetry of shocks across regions," Research Working Paper 99-06, Federal Reserve Bank of Kansas City.

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