Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets
51 Pages Posted: 14 Jan 2020
Date Written: December 2019
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: Suggested Citation