DP7776 EMU, EU, capital market integration and consumption smoothing

Author(s): Atanas Christev, Jacques Melitz
Publication Date: April 2010
Keyword(s): capital market integration, consumption smoothing, currency union, European Monetary Union, European Union
JEL(s): E00, F36, F41, G10
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7776

This empirical study of the impact of EMU on capital market integration and consumption smoothing comes to three conclusions: first, EMU promotes members? holdings of foreign assets and foreign liabilities; second, no benefits of consumption smoothing result; third, EU membership, not a single money, nevertheless increases consumption smoothing. The source of this last influence on consumption smoothing is an important issue. Theoretically it could come from more tradable capital through greater price competition, more contestable home markets and the greater harmonization of regulations. There is also a seeming conflict between our results and those of one strand of the literature. However, the relevant writings concentrate on the effects of asymmetric output shocks while we study the unconditional impact of international portfolio di-versification in the presence of all shocks. This can explain the difference.