Risk sharing in currency unions: The migration channel

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URI: http://hdl.handle.net/10900/114670
http://nbn-resolving.de/urn:nbn:de:bsz:21-dspace-1146708
http://dx.doi.org/10.15496/publikation-56045
Dokumentart: Aufsatz
Date: 2021-03-24
Source: University of Tübingen Working Papers in Business and Economics ; No. 144
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Economics
Other Keywords:
Risk sharing
Currency unions
Labour migration
Migration rates
Euro Area
License: Publishing license excluding print on demand
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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.

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