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Interstate Risk Sharing in Germany: 1970-2006

  • Ralf Hepp

    (Fordham University)

  • Juergen von Hagen

    (University of Bonn and Indiana University)

We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006, estimating the degrees of smoothing of a shock to a state's gross domestic product by factor markets, the government sector, and credit markets, respectively. Within the government sector, we pay special attention to Germany's fiscal equalization mechanism. For pre-unification Germany, we find that about 19 percent of a shock 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 has changed. Factor markets contribute around 50.5 percent to consumption smoothing. The government sector's role is diminished: it smoothes around 10 percent of a shock. Fiscal equalization only plays a very small role for consumption smoothing in Germany.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2010-13.

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Length: 23 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:uct:uconnp:2010-13
Note: This paper was partially written while Ralf Hepp was visiting the University of Connecticut
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
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