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Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe

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Author Info
Sebnem Kalemli-Ozcan () (Department of Economics, University of Houston)
Bent E. Sorensen (Department of Economics, University of Houston)
Oved Yosha (Tel Aviv University)

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Abstract

We find that risk sharing in the European Union (EU) has been increasing over the past decade due to increased cross-ownership of assets across countries. Industrial special- ization has also been increasing over the last decade and we conjecture that risk sharing plays an important causal effect by allowing countries to specialize without being subject to higher income risk even though the variability of output may increase. We believe that lower trade barriers may not have played a dominant causal role during this decade be- cause the effect of lower trade barriers has probably already played itself out. We further find that the asymmetry of GDP fluctuations in the EU has declined steeply over the last two decades. This may be due to economic policies becoming more similar as countries were adjusting fiscal policy in order to meet the Maastricht criteria, but a similar result was found for U.S. states so the finding may be due to a different nature of the shocks to the world economy in the 1990s. We expect to see a further rise in risk sharing between EU countries, accompanied by more specialization. However, the resulting increase in GDP asymmetry should be minor and will have small welfare costs because increased risk sharing should lower income (GNP) asymmetry.

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Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2004-05.

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Length: 38 pages
Date of creation: Feb 2004
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Handle: RePEc:hou:wpaper:2004-05

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Related research
Keywords: financial integration; regional specialization; international portfolio diversification; income insurance;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F2 - International Economics - - International Factor Movements and International Business
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ernst Juerg Weber, 2006. "Monetary policy in a heterogeneous monetary union: the Australian experience," Applied Economics, Taylor and Francis Journals, vol. 38(21), pages 2487-2495, December. [Downloadable!] (restricted)
    Other versions:
  2. Nikos Christodoulakis, 2009. "Ten Years of EMU: convergence, divergence and new policy priorities," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 22, Hellenic Observatory, LSE. [Downloadable!]
  3. Yuliya Demyanyk & Vadym Volosovych, 2006. "Gains from Financial Integration in the European Union: Evidence for New and Old Members," Working Papers 06009, Department of Economics, College of Business, Florida Atlantic University, revised Aug 2007. [Downloadable!]
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  4. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," National Bank of Poland Working Papers 54, National Bank of Poland, Economic Institute. [Downloadable!]
  5. Giancarlo Corsetti, 2008. "A Modern Reconsideration of the Theory of Optimal Currency Areas," Economics Working Papers ECO2008/12, European University Institute. [Downloadable!]
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  6. Emil Stavrev, 2007. "Growth and Inflation Dispersions in EMU: Reasons, the Role of Adjustment Channels, and Policy Implications," IMF Working Papers 07/167, International Monetary Fund. [Downloadable!]
  7. Domenico Giannone & Lucrezia Reichlin, 2005. "Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it?," Macroeconomics 0511016, EconWPA. [Downloadable!]
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  8. Etienne B. Yehoue, 2007. "The CFA Arrangements--More than Just an Aid Substitute?," IMF Working Papers 07/19, International Monetary Fund. [Downloadable!]
  9. Sven Blank, 2009. "International Consumption Risk Sharing with Incomplete Goods and Asset Markets," Working Paper / FINESS 4.2, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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