Risk Sharing in a Politically Divided Monetary Union

• Published in: Open economies review Vol. 32; no. 4; pp. 649 - 669
• Main Authors: Parsley, David, Popper, Helen
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-09-2021; Springer Nature B.V
• Subjects: Development Economics; Durable goods; Economic Policy; Economics; Economics and Finance; European Integration; International Economics; Macroeconomics; Macroeconomics/Monetary Economics//Financial Economics; Monetary unions; National elections; Partisanship; Prices; Research Article; Risk sharing; United States > US; Currency union; Political division; Optimal currency area; Monetary union; F45; F33
• ISSN: 0923-7992; 1573-708X
• DOI: 10.1007/s11079-021-09620-y

We document stark asynchronicity across U.S. states, particularly across groups of states whose populations have voted consistently Democrat or consistently Republican in national elections; and we show that the risk-sharing channels of these groups of states differ substantially. However, we find that these groups of states–even swing states, where the role of fiscal flows is small (on par with Europe’s)–do share risk. Indeed, we halve previous estimates of states’ residual risk by using new data to account for sharing risk through changes in population, prices, and durable goods consumption. These findings indicate that political differences alone do not themselves preclude macroeconomic risk sharing within a monetary union.