Private and Public Risk Sharing in the Euro Area

36 Pages Posted: 8 May 2018

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

European Central Bank

Oana Furtuna

University of Amsterdam; Tinbergen Institute

Massimo Giuliodori

University of Amsterdam - Faculty of Economics & Econometrics (FEE); Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2018

Abstract

This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.

Keywords: risk sharing, time-variation, financial integration, international financial assistance

JEL Classification: C23, E62, G11, G15

Suggested Citation

Cimadomo, Jacopo and Furtuna, Oana and Giuliodori, Massimo, Private and Public Risk Sharing in the Euro Area (May 2, 2018). ECB Working Paper No. 2148, Available at SSRN: https://ssrn.com/abstract=3172708 or http://dx.doi.org/10.2139/ssrn.3172708

Jacopo Cimadomo (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Oana Furtuna

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Massimo Giuliodori

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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