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Risk Sharing and EMU

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  • Melitz, Jacques

Abstract

What are the prospects that risk sharing in EMU will ever attain the levels in the US? So far as the risk sharing in the US depends on interregional transfers through the budget of the federal government, those prospects are poor. So far as the risk sharing in the US takes place though market channels, they are much better. The Paper addresses the theory and evidence on the subject. The evidence would indicate that EMU still lags far behind the US as regards the pooling of risks through portfolio diversification. But there already seems to be little to distinguish the euro area from the US concerning the ability to borrow to smooth shocks. Thus, some extra risk sharing should already be taking place in the euro area through this channel. How much? Further, there is also evidence that the progress of European economic and monetary integration over the last decade has increased the symmetry of business cycles. This evidence is difficult to interpret. It could even be a sign of remaining capital-market imperfections. One of the issues in the Paper is the adequacy of the general framework that Asdrubali, Sørensen and Yosha have proposed for dealing with all of these questions.

Suggested Citation

  • Melitz, Jacques, 2004. "Risk Sharing and EMU," CEPR Discussion Papers 4460, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4460
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Artis, 2008. "What do we now know about currency unions?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 13-29.
    2. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sørensen, 2007. "U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income," Journal of Finance, American Finance Association, vol. 62(6), pages 2763-2801, December.
    3. George S. Tavlas, 2009. "Optimum-Currency-Area Paradoxes," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 536-551, August.
    4. Andrew Hughes Hallett & Drew Scott, 2010. "Scotland: A New Fiscal Settlement," CDMA Working Paper Series 201009, Centre for Dynamic Macroeconomic Analysis.
    5. Mongelli, Francesco Paolo & De Grauwe, Paul, 2005. "Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?," Working Paper Series 468, European Central Bank.

    More about this item

    Keywords

    current account balance; emu; fiscal federalism; portfolio diversification; risk sharing;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F15 - International Economics - - Trade - - - Economic Integration

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