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Title: Interstate Risk Sharing in Germany:1970-2006

Author(s): Ralf Hepp and Jürgen von Hagen

Publication Date: October 2011

Keyword(s): consumption smoothing, factor markets, fiscal federalism and regional risk sharing

Programme Area(s): International Macroeconomics

Abstract: We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006, estimating the degrees of smoothing of a shock to a state?s gross domestic product by factor markets, the government sector, and credit markets, respectively. Within the government sector, we pay special attention to Germany's fiscal equalization mechanism. For pre-unification Germany, we find that about 19 percent of a shock is smoothed by private factor markets, 50 percent is smoothed by the German government sector, and a further 17 percent is smoothed through credit markets. For the postunification period, 1995 to 2006, the relative importance of the smoothing channels has changed. Factor markets contribute around 50.5 percent to consumption smoothing. The government sector?s role is diminished, but still economically significant: it smoothes around 10 percent of a shock

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Bibliographic Reference

Hepp, R and von Hagen, J. 2011. 'Interstate Risk Sharing in Germany:1970-2006'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8593