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Is risk sharing in the United States a regional phenomenon?

  • Bent E. Sorensen
  • Oved Yosha

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.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2000)
Issue (Month): Q II ()
Pages: 33-47

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Handle: RePEc:fip:fedker:y:2000:i:qii:p:33-47:n:v.85no.2
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