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Interstate Risk Sharing in Germany: 1970-2006

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  • Ralf Hepp

    (Fordham University, Department of Economics)

  • Jürgen von Hagen

    (University of Bonn, Indiana University, and CEPR)

Abstract

We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006 following the methodology of Asdrubali et al. (1996). Their framework allows us to estimate the degree of smoothing of a shock to a state's gross domestic product by factor markets, the government sector, and credit markets, respectively. For the time period from 1970 to 1994 – pre-unification Germany – we find that about 19 percent of shocks to a state's gross domestic product (GDP) are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels changes. In the complete sample, factor markets contribute around 50.5 percent to income smoothing, and credit markets contribute another 17.5 percent. The government sector's role is diminished: it smoothes around 10 percent of a shock. For this period, we also split our sample between West and East German states. In West Germany, 63 percent of idiosyncratic income shocks are smoothed out by factor markets; and another 15 percent by the government sector. In East Germany, factor markets smooth about 34.5 percent of the volatility in state GDP, the government sector about 19 percent, and another 18 percent are smoothed by credit markets.

Suggested Citation

  • Ralf Hepp & Jürgen von Hagen, 2010. "Interstate Risk Sharing in Germany: 1970-2006," Fordham Economics Discussion Paper Series dp2010-04, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2010-04
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    References listed on IDEAS

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    Cited by:

    1. Fidrmuc, Jan, 2015. "Political economy of fiscal unions," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 147-157.
    2. Claudia M. Buch & Tobias Körner & Benjamin Weigert, 2015. "Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute," Credit and Capital Markets, Credit and Capital Markets, vol. 48(1), pages 11-49.
    3. Hebous, Shafik & Weichenrieder, Alfons J., 2015. "Towards a fiscal union? On the acceptability of a fiscal transfer system in the eurozone," SAFE White Paper Series 28, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    4. Jacopo Cimadomo & Oana Furtuna & Massimo Giuliodori, 2017. "Private and Public Risk Sharing in the Euro Area," Tinbergen Institute Discussion Papers 17-064/VI, Tinbergen Institute.
    5. Ansgar Belke & Daniel Gros, 2016. "On the Shock-Absorbing Properties of a Banking Union: Europe Compared with the United States," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(3), pages 359-386, September.
    6. Davide Furceri & Aleksandra Zdzienicka, 2015. "The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?," Open Economies Review, Springer, vol. 26(4), pages 683-710, September.
    7. Valentina Milano, 2017. "Risk Sharing in the Euro Zone: the Role of European Institutions," Working Papers CELEG 1701, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    8. Loes Verstegen & Lex Meijdam, 2016. "The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area," EcoMod2016 9622, EcoMod.
    9. Anna Kosior & Michał Rubaszek & Kamil Wierus, 2015. "On the importance of the dual labour market for a country within a monetary union," NBP Working Papers 207, Narodowy Bank Polski, Economic Research Department.
    10. Lars P. Feld & Christoph A. Schaltegger & Janine Studerus, 2018. "Regional Risk Sharing and Redistribution - The Role of Fiscal Mechanisms in Switzerland," CESifo Working Paper Series 6902, CESifo Group Munich.
    11. repec:hpe:journl:y:2016:v:219:i:4:p:137-160 is not listed on IDEAS
    12. Anderson, Nicola & Brooke, Martin & Hume, Michael & Kürtösiová, Miriam, 2015. "Financial Stability Paper 33: A European Capital Markets Union: implications for growth and stability," Bank of England Financial Stability Papers 33, Bank of England.
    13. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516, April.
    14. Belke, Ansgar & Gros, Daniel, 2015. "Banking Union as a Shock Absorber," Ruhr Economic Papers 548, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    15. repec:zbw:rwirep:0548 is not listed on IDEAS
    16. Ansgar Belke & Daniel Gros, 2015. "Banking Union as a Shock Absorber," Ruhr Economic Papers 0548, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    17. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.
    18. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314, April.
    19. Claudia M. Buch, 2013. "From the Stability Pact to ESM - What Next?," Chapters,in: Stability of the Financial System, chapter 5 Edward Elgar Publishing.
    20. Jesper Berg & Laurent Clerc & Olivier Garnier & Erik Nielsen & Natacha Valla, 2015. "From the Investment Plan to the Capital Markets Union: European Financial Structure and Cross Border Risk-sharing," Working Papers 2015-34, CEPII research center.

    More about this item

    Keywords

    Regional Risk-sharing; Factor Markets; Consumption Smoothing; Fiscal Federalism;

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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