Intertemporal risk sharing in the EMU: Disentangling the role of international credit markets and of the governments

20 Pages Posted: 27 Apr 2022

See all articles by Cinzia Alcidi

Cinzia Alcidi

CEPS; Graduate Institute of International and Development Studies (IHEID)

Paolo D'Imperio

Government of the Italian Republic (Italy) - Department of the Treasury

Gilles Thirion

Centre for European Policy Studies (CEPS)

Date Written: June 1, 2017

Abstract

This paper provides a comprehensive examination of the role of intertemporal risk sharing – or consumption smoothing – in absorbing the impact of asymmetric shocks in the euro area. We attempt to disentangle the role of international credit markets from domestic net savings and that of governments from the private sector. Overall, inter-temporal risk sharing accounts for above 30 percent, and is the main absorption channel in the EMU. Households’ savings provide a negligible amount of smoothing whereas the role of corporate savings is significant and steady. Government’s saving is the main source of smoothing, although this effect vanishes after the eruption of the sovereign crisis in 2010, in particular in the periphery. The bulk of consumption smoothing is achieved domestically while international credit markets do not provide risk sharing. This appears to be at odd with the common understanding that greater financial integration should lead to international risk sharing. To contribute to the understanding of this puzzle, we analyze the effect of the main financial instruments for intertemporal consumption smoothing. Our findings suggest that FDI and bank lending did contribute to intertemporal smoothing, while short-term portfolio investments had a negative and dominant role.

Suggested Citation

Alcidi, Cinzia and D'Imperio, Paolo and Thirion, Gilles, Intertemporal risk sharing in the EMU: Disentangling the role of international credit markets and of the governments (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=4080894 or http://dx.doi.org/10.2139/ssrn.4080894

Cinzia Alcidi

CEPS ( email )

1 Place du Congres
Brussels, 1000
Belgium

Graduate Institute of International and Development Studies (IHEID) ( email )

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Geneva, 1211
Switzerland

Paolo D'Imperio (Contact Author)

Government of the Italian Republic (Italy) - Department of the Treasury ( email )

Via XX Settembre, 97
Rome, 00187
Italy

Gilles Thirion

Centre for European Policy Studies (CEPS) ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

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