Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets

51 Pages Posted: 14 Jan 2020

See all articles by Joseba Martinez

Joseba Martinez

London Business School - Department of Economics

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Markus Sihvonen

Bank of Finland

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a banking union; a capital market union; and complete financial markets. We show that a banking union is efficient at sharing all domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). Using a calibrated model we provide evidence of substantial welfare gains from a banking union and, in the presence of supply shocks, from a capital market union.

Keywords: Banking Union, capital market union, Currency Union, incomplete markets, Risk Sharing

JEL Classification: E44, F36, F45

Suggested Citation

Martinez, Joseba and Philippon, Thomas and Sihvonen, Markus, Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets (December 2019). Available at SSRN: https://ssrn.com/abstract=3518558

Joseba Martinez (Contact Author)

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Markus Sihvonen

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

HOME PAGE: http://sites.google.com/site/mesihvonen/

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