Risk Sharing with Gradual Financial Integration : the Visegrád Countries and the Euro Area
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. (original abstract)
- Adam K., Jappelli T., Menichini A., Padula M., Pagano M. (2002), Analyse, Compare, and Apply Alternative Indicators and Monitoring Methodologies to Measure the Evolution of Capital Market Integration in the European Union. Report to the European Commission.
- Aguiar M., Gopinath G. (2004), Emerging market business cycles. The cycle is the trend, NBER Working Papers, 10734, National Bureau of Economic Research.
- Backus D.K., Kehoe P. J., Kydland F.E. (1992), International real business cycles, Journal of Political Economy, 100(4), 745-775.
- Baele L., Ferrando A., Hordahl P., Krylova E., Monnet C. (2004), Measuring financial integration in the euro area, Occasional Paper Series, 14, European Central Bank.
- Bai Y., Zhang J. (2012), Financial integration and international risk sharing, Journal of International Economics, 86(1), 17-32.
- Eijffinger S., Wagner W. (2001), The feasible gains from international risk sharing, CESifo Working Paper Series, 472.
- Epstein B., Mukherjee R., Ramnath S. (2016), Taxes and international risk sharing, Journal of International Economics, 102, 310-326.
- Holmes M.J., Otero J. (2016), On financial liberalization and long-run risk sharing, International Economics, 148, 31-40.
- Kehoe P., Perri F. (2002), International business cycles with endogenous incomplete markets, Econometrica, 70(3), 907-928.
- Kim H.Y. (2014), International financial integration and risk sharing among countries: A production- -based approach, Journal of the Japanese and International Economies, 31, 16-35.
- King R.G., Plosser C.I., Stock J.H., Watson M.W. (1991), Stochastic trends and economic fluctuations, American Economic Review, 81(4), 819-840.
- Kose A., Prasad E., Terrones M. (2003), Financial integration and macroeconomic volatility, IMF Working Papers, 03/50, International Monetary Fund.
- Kose M.A., Prasad E.S., Terrones M.E. (2009), Does financial globalization promote risk sharing?, Journal of Development Economics, 89(2), 258-270.
- Lane P., Milesi-Ferretti G.-M. (2007), The external wealth of nations mark: II revised and extended estimates of foreign assets and liabilities, 1970-2004, Journal of International Economics, 73(2), 223-250.
- Levine R. (1997), Financial development and economic growth. Views and agenda, Journal of Economic Literature, 35(2), 688-726.
- Lewis K. (1995), What can explain the apparent lack of international consumption risk sharing?, NBER Working Papers, 5203, National Bureau of Economic Research.
- Lewis K. (1999), Trying to explain home bias in equities and consumption, Journal of Economic Literature, 37(2), 571-608.
- Mace B. (1991), Full insurance in the presence of aggregate uncertainty, Journal of Political Economy, 99(5), 928-956.
- Malik S. (2015), Financial-integration thresholds for consumption risk-sharing, International Review of Economics & Finance, 38, 73-93.
- Obstfeld M., Rogoff K. (1994), Foundations of International Macroeconomics, The MIT Press.
- Prasad E., Rogoff S., Wei S., Kose M. (2004), Financial globalization in developing countries. Some empirical evidence, W P/06/189, International Monetary Fund.
- Sorensen B., Yosha O. (1998), International risk sharing and European monetary unification, Journal of International Economics, 45(2), 211-238.
- Suzuki Y. (2014), Financial integration and consumption risk sharing and smoothing, International Review of Economics & Finance, 29, 585-598.
- Tesar L. (1993), International risk-sharing and non-traded goods, Journal of International Economics, 35(1-2), 69-89.
- van Wincoop E. (1999), How big are potential welfare gains from international risk sharing?, Journal of International Economics, 47(1), 109-135.
- Ventura L. (2008), Risk sharing opportunities and macroeconomic factors in Latin American and Caribbean countries: A consumption insurance assessment, Policy Research Working Paper Series, 4490, The World Bank.
- Zhou D. (2006), Essays on Financial Structure and Macroeconomic Performance, PhD thesis, Tilburg University.