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Risk‐sharing and EMU

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  • Jacques Mélitz

Abstract

What are the prospects that risk‐sharing in EMU will ever attain the levels in the US? So far as 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. This article 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 in the ability to borrow to smooth shocks. Thus, some extra risk‐sharing should already be taking place in the euro area through this channel. But 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. But this evidence is difficult to interpret. It could even be a sign of remaining capital‐market imperfections. With respect to the theoretical aspects, one of the issues in the article is the adequacy of the general framework that Asdrubali, Sørensen and Yosha have proposed for dealing with all of these questions.

Suggested Citation

  • Jacques Mélitz, 2004. "Risk‐sharing and EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 815-840, November.
  • Handle: RePEc:bla:jcmkts:v:42:y:2004:i:4:p:815-840
    DOI: 10.1111/j.0021-9886.2004.00531.x
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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. Mr. Paul Cashin & Mr. Antonio Lemus, 2012. "The Eastern Caribbean Currency Union: Would a Fiscal Insurance Mechanism Mitigate National Income Shocks?," IMF Working Papers 2012/017, International Monetary Fund.
    4. George S. Tavlas, 2009. "Optimum‐Currency‐Area Paradoxes," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 536-551, August.
    5. Hughes Hallett, Andrew & Scott, Drew, 2010. "Scotland: A New Fiscal Settlement," SIRE Discussion Papers 2010-23, Scottish Institute for Research in Economics (SIRE).
    6. Francesco Paolo Mongelli, 2008. "European Economic and Monetary Integration, and the Optimum Currency Area Theory," European Economy - Economic Papers 2008 - 2015 302, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Hughes Hallett, Andrew & Scott, Drew, 2010. "Scotland: A New Fiscal Settlement," SIRE Discussion Papers 2010-23, Scottish Institute for Research in Economics (SIRE).
    8. 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.

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    JEL classification:

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

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