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Risk sharing with gradual financial integration: the Visegrád countries and the euro area

Gilbert Mbara

Bank i Kredyt, 2018, vol. 49, issue 1, 17-44

Abstract: Since the year 2000, three Visegrád Group economies – of Poland, the Czech Republic and Hungary – have gradually become financially integrated with the euro area (EA) economies. However, standard risk sharing regressions fail to show any significant consumption risk-sharing effects following integration. Using a measure of financial integration based on the coefficients of co-movement of interest rates between each country and the aggregate euro economies, I find that risk sharing occurs whenever there is a premium over the integrated area borrowing rates. For Poland, financial integration with the EA economies helps dampen the effects of income shocks as postulated by the risk sharing hypothesis. For Hungary, financial integration with the EA economies explains its consumption growth, but the latter is independent of its income. The results for Poland and Hungary show that a well-defined measure of financial integration is needed in order to find risk sharing between financially integrated regions.

Keywords: risk sharing; consumption smoothing; financial integration (search for similar items in EconPapers)
JEL-codes: F41 F36 E21 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:nbp:nbpbik:v:49:y:2018:i:1:p:17-44