Risk-sharing and Consumption-smoothing Patterns in the US and the Euro Area: A comprehensive comparison

This paper compares the capacity to smooth the impact of asymmetric shocks in the US and in the euro area (EA) and examines the various mechanisms through which the shock absorption occurs. It first notes that comparable data for the US and the EA are not readily available, and that in the US, state accounting is such that what the literature commonly calls international risk-sharing in reality embeds inter-temporal consumption-smoothing through retained corporate earnings. With this in mind, we build euro area aggregates suitable for comparison. Our findings confirm that international capital markets in the US are a more powerful tool for risk-sharing than in the EA, but less so than previously reported. The better performance of the US is explained by very poor shock-absorption dynamics in the peripheral euro area countries, especially after 2010, as well as by a higher persistence of shocks in the euro area relative to the US.