Risk Sharing in Currency Unions: The Migration Channel

42 Pages Posted: 5 Apr 2021

See all articles by Wilhelm Kohler

Wilhelm Kohler

University of Tuebingen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Gernot J. Müller

University of Tuebingen - Department of Economics

Susanne Wellmann

University of Tuebingen

Multiple version iconThere are 2 versions of this paper

Date Written: 2021

Abstract

Country-specific business cycle fluctuations are potentially very costly for member states of currency unions because they lack monetary autonomy. The actual costs depend on the extent to which consumption is shielded from these fluctuations and thus on the extent of risk sharing across member states. The literature to date has focused on financial and credit markets as well as on transfer schemes as channels of risk sharing. In this paper, we show how the standard approach to quantify risk sharing can be extended to account for migration as an additional channel of cross-country risk sharing. In theory, migration should play a key role when it comes to insulating per capita consumption from aggregate fluctuations, and our estimates show that it does so indeed for US states, but not for the members of the Euro area (EA). Consistent with these results, we also present survey evidence which shows that migration rates are about 20 times higher in the US. Lastly, we find, in line with earlier work, that risk sharing is generally much more limited across EA members.

JEL Classification: F410, F220, G150, J610

Suggested Citation

Kohler, Wilhelm K. and Müller, Gernot J. and Wellmann, Susanne, Risk Sharing in Currency Unions: The Migration Channel (2021). CESifo Working Paper No. 8982, Available at SSRN: https://ssrn.com/abstract=3819103

Wilhelm K. Kohler (Contact Author)

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Susanne Wellmann

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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