Economic Integration and Consumption Risk Sharing : A Comparison of Eurozone and OECD Countries

Economic theory predicts that economic integration can facilitate improvements in international consumption risk sharing. We test this proposition by comparing risk sharing among Eurozone members and members of the Organisation for Economic Co-operation and Development (OECD) using a common correlated effects estimator. The results reveal that the OECD members outperform the Eurozone members in terms of short run and long run risk sharing, despite the barriers to risk sharing being considerably lower among the latter. We attribute this outcome to lower business cycle synchronization and stock return correlations among OECD members, which creates better opportunities to share risk within the group. The results highlight the trade-off between the benefits of business cycle synchronization and international risk sharing. However, the benefits associated with the improved risk sharing are increasing with the number of countries in the monetary union