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Does a Currency Union Need a Capital Market Union? Risk Sharing via Banks and Markets

Joseba Martinez, Thomas Philippon and Markus Sihvonen

No 14220, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Banking Union; capital market union; Currency Union; incomplete markets; Risk Sharing (search for similar items in EconPapers)
JEL-codes: E44 F36 F45 (search for similar items in EconPapers)
Date: 2019-12
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