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Risk-Sharing Mechanisms in Euro Area: Empirical Analysis and Interpretation Challenges

This paper by J. Cimadomo, O. Furtuna, and M. Giuliodori explores private and public risk-sharing in the euro area from 1999 to 2015. Findings show output shock smoothing increased to 65% post-crisis due to EFSF-ESM. The study raises issues on measures like VAT rate and sovereign yield differentials, highlighting the unclear interpretation of ESFS/ESM as a risk-sharing device. Comparisons with other exercises reveal contrasting results, possibly attributed to modeling variations and pro-cyclical consolidation in crisis countries. The research emphasizes the importance of domestic budgets in risk-sharing mechanisms.

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Risk-Sharing Mechanisms in Euro Area: Empirical Analysis and Interpretation Challenges

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  1. Comments on:J. Cimadomo, O. Furtuna & M. Giuliodori: “Private and public risk-sharing in the euro area” Pietro Tommasino Bank of Italy – DG Economics, Statistics and Research November 16th, 2017 – Madrid

  2. Short summary of the paper

  3. Short summary of the paper (2) • Sample: 11 EA countries; 1999-2015 • 870 observations

  4. Short summary of the paper (3) Findings: Output shock smoothing: • early years of EMU: 40%, • aftermath of crisis: 65%, mainly thanks to EFSF-ESM

  5. Outline • Some (minor) issues concerning the empirical exercise • Some issues concerning the interpretation of the results

  6. Issues concerning the empirical exercise Statutory VAT rate and statutory tax rate on dividends included among controls • This is good, as it captures the risk-sharing role of domestic public budgets. • Why not use more encompassing measures? • (Taxes+Social Security Contributions)/GDP; (Primary) expenditures/GDP? • The domestic budget is commonly thought as the major risk- sharing device! (Adrubali et al., QJE 1996 etc.).

  7. Issues concerning the empirical exercise (2) 10-year sovereign yield differentials included among controls • Sovereign bonds cross-holdings are just one of the main risk-sharing channel, why not include also corporate yield differentials and stock-price dynamics differentials? • Btw, not very clear how to interpret the minus sign on the sovereign yield differentials

  8. Issues concerning the empirical exercise (3)

  9. Interpretation issues ESFS/ESM • A very peculiar risk sharing device, when compared with financial markets or automatic stabilizers • not automatic • price to be paid (conditionality) unclear ex ante • only insurance against “tail events”

  10. Interpretation issues: comparison with other exercises Furceri-Zdzienicka (2015) Cimadomo et al. (2017) With more standard techniques, results are opposite Not sure, but maybe again this is due to the way the risk-sharing role of the domestic budgetis modelled. e.g.: in crisis countries, we had pro-cyclical consolidation (also in relation to EFSF-ESM aid)

  11. Interpretation issues: comparison with other exercises (2)

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