Risk Sharing in a Monetary Union: Blue States and Red States

Abstract

We examine state GDP synchronicity and consumption risk-sharing channels within the United States as a whole, and among states whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We document three facts: (1) state GDP growth is asynchronous, and Blue and Red states are particularly out of sync; (2) at the same time, interstate consumption risk-sharing is very high{it is high even across the political divide, and it is high even where the role of fiscal flows is minimal; and (3) the channels of risk sharing used by Blue, Red, and Swing states are quite different. We also show that previous estimates of states' unshared idiosyncratic consumption risk can be cut in half by accounting for population changes, prices, and durable goods. Together, our findings suggest that political divisions, by themselves, are not necessarily obstacles to risk sharing within a monetary union.

Keywords: monetary union, consumption risk-sharing, economic and political divergence

JEL Classification: F45, F42, F33, F02