No. 327 - International Risk Sharing and European Monetary Unification

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by Bent E. Sørensen and Oved YoshaFebruary 1998

We explore income and consumption smoothing patterns among European Community countries and among OECD countries during the period 1966-90. We find that for OECD as well as for EC countries about 40 percent of shocks to GDP are smoothed at the one year frequency, with about half the smoothing achieved through national government budget deficits and half by corporate saving. At the three year differencing frequency only 25 percent of shocks to GDP are smoothed, mainly via government lending and borrowing. In the absence of alternative income and consumption smoothing mechanisms, the restrictions on budget deficits imposed by the Maastricht Treaty should be relaxed to allow governments to run large temporary deficits in response to output shocks.

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