Does a Currency Union Need a Capital Market Union
Martinez, Joseba; Philippon, Thomas; Sihvonen, Markus (12.08.2022)
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JulkaisusarjaJournal of International Economics
NumeroNovember ; 2022
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-202109131511
We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a money market union; a capital market union; and complete financial markets. We show that a money market union is efficient at sharing domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). In a numerical exercise, we find that the welfare gain of moving from segmented markets to a money market union is of roughly similar magnitude to that of moving from a money market to a capital market union.