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Risk Sharing and the Adoption of the Euro

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  • Alessandro Ferrari
  • Anna Rogantini Picco

Abstract

This paper empirically evaluates whether adopting a common currency has changed the level of consumption smoothing of euro area member states. We construct a counterfactual dataset of macroeconomic variables through the synthetic control method. We then use the output variance decomposition of Asdrubali, Sorensen and Yosha (1996) on both the actual and the synthetic data to study if there has been a change in risk sharing and through which channels. We find that the euro adoption has reduced risk sharing and consumption smoothing. We further show that this reduction is mainly driven by the periphery countries of the euro area who have experienced a decrease in risk sharing through private credit.

Suggested Citation

  • Alessandro Ferrari & Anna Rogantini Picco, 2022. "Risk Sharing and the Adoption of the Euro," Papers 2205.07009, arXiv.org.
    • Handle: RePEc:arx:papers:2205.07009
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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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