Risk sharing and EMU

Mélitz, Jacques (2004) Risk sharing and EMU. Discussion paper. University of Strathclyde, Glasgow.

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Abstract

What are the prospects that risk-sharing in the EMU will ever attain the levels in the U.S.? So far as the risk-sharing in the U.S. depends on interregional transfers through the budget of the federal government, those prospects are poor. So far as the risk-sharing in the U.S. takes place though market channels, they are much better. The paper addresses the theory and evidence on the subject. Asdrubali, Sørensen and Yosha provide a general framework of analysis. One issue is the adequacy of the framework. With respect to the evidence, the EMU still lags far behind the U.S. as regards the pooling of risks through portfolio diversification. But there already seems to be little to distinguish the euro zone from the U.S. concerning the ability to borrow to smooth shocks. Thus, the extent of risk-sharing via credit – a matter that Asdrubali, Sørensen and Yosha raise – is of special interest. Further, the empirical evidence indicates that the progress of European economic and monetary integration over the last decade has increased the symmetry of business cycles. However, this could be a sign of remaining capital-market imperfections, though that is only one interpretation.