Risk-sharing and Consumption-smoothing Patterns in the US and the Euro Area: A comprehensive comparison. CEPS Working Document No 2017/04, May 2017

Abstract

This paper compares the capacity to smooth the impact of asymmetric shocks in the US and in\nthe euro area (EA) and examines the various mechanisms through which the shock absorption\noccurs. It first notes that comparable data for the US and the EA are not readily available, and\nthat in the US, state accounting is such that what the literature commonly calls international\nrisk-sharing in reality embeds inter-temporal consumption-smoothing through retained\ncorporate earnings. With this in mind, we build euro area aggregates suitable for comparison.\nOur findings confirm that international capital markets in the US are a more powerful tool for\nrisk-sharing than in the EA, but less so than previously reported. The better performance of the\nUS is explained by very poor shock-absorption dynamics in the peripheral euro area countries,\nespecially after 2010, as well as by a higher persistence of shocks in the euro area relative to\nthe US.