Research and Publications
Interstate Risk Sharing in Germany: 1970-2006
Jürgen von Hagen, Ralf Hepp
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 percent of a shock are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels has changed. Factor markets contribute around 50.5 percent to consumption smoothing. The government sector's role is diminished: it smoothes around 10 percent of a shock. Fiscal equalization only plays a very small role for consumption smoothing in Germany.
Ralf Hepp & Jürgen von Hagen, 2010. "Interstate Risk Sharing in Germany: 1970-2006", Working papers 2010-13, University of Connecticut, Department of Economics.
Regional Risk-sharing, FactorMarkets, Consumption Smoothing, Fiscal Federalism