Risk Sharing in a Politically Divided Monetary Union

Open Economies Review https://doi.org/10.1007/s11079-021-09620-y

21 Pages Posted: 15 Feb 2018 Last revised: 15 Apr 2021

See all articles by David C. Parsley

David C. Parsley

Vanderbilt University – Finance and Economics

Helen Popper

Santa Clara University - Leavey School of Business - Economics Department

Date Written: April 15, 2021

Abstract

We document stark asynchronicity across U.S. states, particularly across groups of states whose populations have voted consistently Democrat or consistently Republican in national elections; and we show that their risk-sharing channels differ substantially. However, we find that these groups of states – even swing states, where the role of fiscal flows is small (on par with Europe's) – do share risk. Indeed, we halve previous estimates of states' residual risk by using new data to account for sharing risk through changes in population, prices, and durable goods consumption. These findings indicate that political differences alone do not preclude macroeconomic risk sharing within a monetary union.

Keywords: Monetary union, Optimal currency area, Currency union, Political division

JEL Classification: F33, F45

Suggested Citation

Parsley, David C. and Popper, Helen, Risk Sharing in a Politically Divided Monetary Union (April 15, 2021). Open Economies Review https://doi.org/10.1007/s11079-021-09620-y, Available at SSRN: https://ssrn.com/abstract=3117556 or http://dx.doi.org/10.2139/ssrn.3117556

David C. Parsley

Vanderbilt University – Finance and Economics ( email )

401 21st Avenue South
Nashville, TN 37203
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HOME PAGE: https://business.vanderbilt.edu/bio/david-parsley/

Helen Popper (Contact Author)

Santa Clara University - Leavey School of Business - Economics Department ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-6952 (Phone)
(408) 554-2331 (Fax)

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