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Risk-sharing by financial markets in federal systems: a critique of existing empirical assessments

Author

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  • Sebastian Dullien

    (Macroeconomic Policy Institute (IMK), Düsseldorf and HTW Berlin – University of Applied Sciences, Germany)

Abstract

This paper criticizes the standard methodology used to measure the importance of different channels of risk-sharing in federal states such as the one used in Asdrubali et al.'s (1996) seminal contribution. It argues that the methodology chosen in these papers systematically underestimates the role federal governments play in stabilizing the business cycle in its member states (and overstates the role of financial markets in stabilization) as it (a) ignores the possibility of direct spending by the federal government in a single state stabilizing state GDP, (b) strips out effects of transfers and grants in national recessions, (c) counts smoothing of distributed profits by domestic firms as 'smoothing by capital markets' and (d) counts a normal variation of households' savings to smooth consumption as 'smoothing by credit markets'.

Suggested Citation

  • Sebastian Dullien, 2019. "Risk-sharing by financial markets in federal systems: a critique of existing empirical assessments," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(3), pages 361-368, July.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:3:p361-368
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    Citations

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    Cited by:

    1. Pablo Burriel & Panagiotis Chronis & Maximilian Freier & Sebastian Hauptmeier & Lukas Reiss & Dan Stegarescu & Stefan Van Parys, 2020. "A fiscal capacity for the euro area: lessons from existing fiscal-federal systems," Occasional Papers 2009, Banco de España.
    2. Lukas Reiss, 2021. "Fiscal Risk Sharing and Redistribution Between Austrian States," WIFO Working Papers 629, WIFO.

    More about this item

    Keywords

    European Monetary Union; income insurance; international capital markets; international integration; risk-sharing;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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