DP9541 Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns

Author(s): Sebnem Kalemli-Ozcan, Emiliano Luttini, Bent E Sørensen
Publication Date: July 2013
Keyword(s): Capital Markets, Income Insurance, International Financial Integration
JEL(s): E2, E6, F15, G15
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9541

Using a variance decomposition of shocks to GDP, we quantify the role of international factor income, international transfers, and saving in achieving risk sharing during the recent European crisis. We focus on the sub-periods 1990--2007, 2008--2009, and 2010 and consider separately the European countries hit by the sovereign debt crisis in 2010. We decompose risk sharing from saving into contributions from government and private saving and show that fiscal austerity programs played an important role in hindering risk sharing during the sovereign debt crisis.