Channels of Interstate Risksharing: US 1963-1990

Bent E. Soerensen, Pierfederico Asdrubali and Oved Yosha
Authors registered in the RePEc Author Service: Bent E. Sorensen

No 95-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: We develop a framework for quantifying the amount of risksharing among states in the US, and construct data which allow us to decompose a shock to gross state product into several components. For the period 1963-1990 we find that 40% of shocks to state gross domestic product are smoothed by capital markets, 14% are smoothed by the federal government, and 24% are smoothed by credit markets. The remaining 22% are not smoothed. We decompose the federal government smoothing into sub-categories: taxes, transfers, and grants to states, finding, for example, that in comparision to the tax-transfer system, the magnitude of smoothing through the grant system is small (2.7% of a shock), and that the unemployment insurance system smoothes 1.8% of a shock. Finally, we repeat the analysis for two sub-periods, finding that the amount and composition of federal government smoothing is stable through time. However, we detect an increase in the amount of capital markets smoothing, a sharp decrease in the amount of credit market smoothing, and a decrease in the overall fraction of a shock smoothed.

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Working Paper: Channels of Interstate Risksharing: U.S. 1963-1990 (1995)
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