The Role of Risk Sharing in Attenuating Business Cycles Within Currency Unions

The United States is a currency union where multiple risk-sharing mechanisms--- migration, fiscal transfers, income diversification and credit markets---buffer consumption from local income fluctuations. We show that risk sharing not only directly smooths consumption but also indirectly stabilizes income by dampening the local multiplier. Combining causal estimates from regional military buildups with a multi-region quantitative model, we find that current levels of risk-sharing cut state-level consumption volatility by a factor of four. Crucially, the indirect stabilization of income accounts for nearly half of this effect, implying substantially larger benefits from integration than conventional measures suggest.

Source: arXiv:2608.04977v1 - http://arxiv.org/abs/2608.04977v1 PDF: https://arxiv.org/pdf/2608.04977v1 Original Link: http://arxiv.org/abs/2608.04977v1