DP14220 Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets

Author(s):	Joseba Martinez, Thomas Philippon, Markus Sihvonen
Publication Date:	December 2019
Keyword(s):	Banking Union, capital market union, Currency Union, incomplete markets, Risk Sharing
JEL(s):	E44, F36, F45
Programme Areas:	Macroeconomics and Growth
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14220

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.