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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | International risk sharing in the European Monetary Union |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | ADEMU |
| Series Name | ADEMU Working Papers Series |
| Number | 2017/055 |
| Number of Pages | 35 |
| Date | 2017 |
| Abstract Text | This paper aims at empirically assessing the effect of the adoption of the euro on the ability of euro area member states to smooth consumption and share risk. With the objective of evaluating the economic performance of euro area countries in the scenario where the euro had not been adopted, we construct a counterfactual dataset of macroeconomic variables via the Synthetic Control Method. In order to get some preliminary measures of risk sharing, we compute correlations between consumption and GDP within a country, bilateral consumption correlations, and Brandt-Cochrane-Santa Clara indices across euro area member states. We then decompose risk sharing in different channels by means of the Asdrubali, Sorensen and Yosha (1996) output variance decomposition. Our difference in difference estimates show that the euro has not affected the level of international risk sharing across euro area countries, but has partially reduced the ability of member states to smooth consumption. We attribute this change to the higher GDP growth generated by the adoption of the euro, which has been accompanied by a greater output volatility. We also report differential effects for euro area core and periphery countries, showing that the former have not suffered any negative effect from the adoption of the euro in terms of risk sharing whereas the latter are now less able to smooth consumption. |
| Official URL | http://hdl.handle.net/10230/28282 |
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