International Risk Sharing in the EMU

36 Pages Posted: 4 Aug 2017

See all articles by Alessandro Ferrari

Alessandro Ferrari

University of Zurich - Department of Economics

Anna Rogantini Picco

Sveriges Riksbank - Research Division

Date Written: July 2016

Abstract

This paper aims at empirically assessing the effect of the adoption of the euro on the ability of euro area member states to smooth consumption and share risk. With the objective of evaluating the economic performance of euro area countries in the scenario where the euro had not been adopted, we construct a counterfactual dataset of macroeconomic variables via the Synthetic Control Method. In order to get some preliminary measures of risk sharing, we first compute bilateral consumption correlations and Brandt-Cochrane-Santa Clara Indexes across euro area member states. We then decompose risk sharing in different channels by means of the Asdrubali, Sorensen and Yosha (1996) output decomposition. Our preliminary measures and our decomposition of risk sharing are computed with both actual and synthetic data so as to identify whether there has been any effect of the adoption of the euro on risk sharing and through which channels it has occurred. We find that the euro has not affected the level of risk sharing across euro area countries, but has partially reduced the ability of member states to smooth consumption. We attribute this change to the higher GDP growth generated by the adoption of the euro, which has been accompanied by a greater output volatility. We also report differential effects for core and periphery countries, showing that the former have not suffered any negative effects from the adoption of the euro in terms of risk sharing.

Keywords: Risk Sharing Mechansims, Consumption Smoothing Channels, Euro Area, Synthetic Control Method

JEL Classification: F32, F36, F41

Suggested Citation

Ferrari, Alessandro and Rogantini Picco, Anna, International Risk Sharing in the EMU (July 2016). European Stability Mechanism Working Paper No. 17, Available at SSRN: https://ssrn.com/abstract=3013105 or http://dx.doi.org/10.2139/ssrn.3013105

Alessandro Ferrari (Contact Author)

University of Zurich - Department of Economics ( email )

Z├╝rich
Switzerland

Anna Rogantini Picco

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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