Bank of Finland
P.O. Box 160
Institutional Affiliation: Bank of Finland
NBER Working Papers and Publications
|June 2019||Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets|
with Joseba Martinez, Thomas Philippon: w26026
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.