Journal Article

Interstate risk sharing in Germany: 1970–2006

Ralf Hepp and Jürgen von Hagen

in Oxford Economic Papers

Volume 65, issue 1, pages 1-24
Published in print January 2013 | ISSN: 0030-7653
Published online March 2012 | e-ISSN: 1464-3812 | DOI: https://dx.doi.org/10.1093/oep/gps018
Interstate risk sharing in Germany: 1970–2006

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  • Macroeconomic Aspects of International Trade and Finance
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Public Economics

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We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006, estimating the degrees of smoothing of a shock to a state's gross domestic product by factor markets, the government sector, and credit markets, respectively. Within the government sector, we pay special attention to Germany's fiscal equalization mechanism. For pre-unification Germany, we find that about 19% of a shock is smoothed by private factor markets, 50% is smoothed by the German government sector, and a further 17% is smoothed through credit markets. For the post-unification period, 1995 to 2006, the relative importance of the smoothing channels has changed. Factor markets contribute around 50.5% to consumption smoothing. The government sector's role is diminished, but still economically significant: it smoothes around 10% of a shock.

Keywords: H77; E63; F42

Journal Article.  9399 words.  Illustrated.

Subjects: Macroeconomic Aspects of International Trade and Finance ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Public Economics

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