Risk Sharing in a Politically Divided Monetary Union

Abstract

We document stark asynchronicity across U.S. states, particularly across groups of states whose populations have voted consistently Democrat or consistently Republican in national elections; and we show that the risk-sharing channels of these groups of states differ substantially. However, we find that these groups of states–even swing states, where the role of fiscal flows is small (on par with Europe’s)–do share risk. Indeed, we halve previous estimates of states’ residual risk by using new data to account for sharing risk through changes in population, prices, and durable goods consumption. These findings indicate that political differences alone do not themselves preclude macroeconomic risk sharing within a monetary union.

What types of capital flows help improve international risk sharing?

“…Our paper studies how remittance inflows affect measures of international risk sharing. Differences in institutional quality and stages of development between countries that receive remittances and aid flows and those that send these flows can boost the risk sharing potential of remittances (Callen, Imbs and Mauro 2015;Parsley and Popper 2021). 7 Other studies document that faster growing developing countries tend to receive more private capital inflows, but experience even more public capital outflows (Aguiar and Amador 2011;Alfaro, Kalemli-Ozcan and Volosovych 2014;Kim and Zhang 2020).…”