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.