Citation

Discussion Paper Details

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Title: Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets

Author(s): Joseba Martinez, Thomas Philippon and Markus Sihvonen

Publication Date: December 2019

Keyword(s): Banking Union, capital market union, Currency Union, incomplete markets and Risk Sharing

Programme Area(s): Macroeconomics and Growth

Abstract: We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a banking union; a capital market union; and complete financial markets. We show that a banking union is efficient at sharing all domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). Using a calibrated model we provide evidence of substantial welfare gains from a banking union and, in the presence of supply shocks, from a capital market union.

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Bibliographic Reference

Martinez, J, Philippon, T and Sihvonen, M. 2019. 'Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14220