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V. Milano & P. Reichlin: Risk Sharing across the US and EMU - The Role of Public Institutions

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Risk sharing across EMU countries falls short of the level achieved in other federations (such as Canada, Germany and the US) by a wide margin. This observation has been documented in various studies, such as Sala-i-Martin and Sachs (1991), Bayoumi and Klein (1997), Sorensen and Yosha (1998) and Von Hagen and Hepp (2013). Various updates and refinements of this work up to 2014 (Alcidi et al. (2016), Furceri and Zdzienicka (2015), Rogantini Picco (2015), Milano (2016)) confirm these findings and offers some other interesting insights about the way the US Federation and the European Monetary Union (EMU) have achieved some degree of consumption smoothing before and after the big recession. A variance decomposition analysis along the lines pioneered by Asdrubali et al. (1996) may give some partial answers to the following key questions. To what extent the lack of risk sharing within the EMU is a consequence of (i) the limited role of centralized fiscal authorities, (ii) the effort of peripheral countries to comply with the rules of the growth and stability pact or (iii) the lack of a developed and internationally integrated financial market? These are the basic findings that we derive from the analysis: (a) the US Federation achieves more intensive risk sharing largely because of a more integrated financial market, (b) public (national and super-national) institutions have a larger role in providing risk sharing in the EMU than in the US, especially after the implementation of the ESFS, ESFM and the ESM, and (c) the contribution of these institutions to risk sharing after the big recession more than compensated the dis-smoothing caused by a pro-cyclical fiscal consolidation and by households' increased precautionary savings. 

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