Shock absorption via savings in the EMU: The role of international and public mechanisms

Abstract

Previous literature on the channels of risk sharing in the EMU suggests that consumption smoothing through net savings is the dominant channel. This research aims to provide a deeper understanding and a more accurate interpretation of the working of the savings channel by exploring its international and public dimension. To do so, we quantify the shock absorption from external versus domestic mechanisms, and from the government and private sectors. We then measure consumption smoothing patterns across key time periods, episodes of financial stress, economic upturns and downturns, fiscal policy stances, and investigate possible heterogeneity between core and periphery countries.