Consumption risk -sharing in the European Monetary Union and candidate countries

Gergana Zlateva-Elghouayel, Fordham University


This paper proposes to evaluate the potential contribution of a monetary union with regards to achieving fuller degree of consumption risk insurance. I conduct empirical test of the hypothesis of consumption risk sharing using two models and two sets of countries: one—the core members of the European Monetary Union (EMU), and the second united simply by their status as countries candidates (CC) to join the EU in 2004. I find support for the null hypothesis of complete consumption risk sharing more often for the EMU countries than for CC countries and observe larger number of rejections over longer cycles than over shorter ones. Using the second model I find that the average degree of risk sharing among EMU countries is up to 1.5 times larger than that for CC countries. These results lend support to the proposition that members of an economic and monetary union can achieve higher level of risk diversification and sharing compared to countries lacking such close economic ties. Finally, I find that EMU members share risk with nonmembers at a much lower level, while the CC group has better consumption risk sharing with the EMU compared to the one within its own group. With this I conclude that both EMU and CC countries will gain in consumption risk sharing when the union is enlarged.

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Recommended Citation

Zlateva-Elghouayel, Gergana, "Consumption risk -sharing in the European Monetary Union and candidate countries" (2004). ETD Collection for Fordham University. AAI3125033.