Abstract
We document stark asynchronicity across U.S. states, particularly across groups of states whose populations have voted consistently Democrat or consistently Republican in national elections; and we show that the risk-sharing channels of these groups of states differ substantially. However, we find that these groups of states–even swing states, where the role of fiscal flows is small (on par with Europe’s)–do share risk. Indeed, we halve previous estimates of states’ residual risk by using new data to account for sharing risk through changes in population, prices, and durable goods consumption. These findings indicate that political differences alone do not themselves preclude macroeconomic risk sharing within a monetary union.
Highlights
Clashing political preferences, along with concerns over migration and fiscal transfers, raise questions about how macroeconomic risks are able to be shared within a monetary union
Do political divisions themselves stand in the way of economic integration within a monetary union? Do they prevent member states from sharing risk? This paper addresses these questions by focusing on the United States
See Cornaggia et al (2020) who document differences across Blue and Red states in credit analysts’ home biases, and Bachmann et al (2019) who document differences in inflation expectations across Blue and Red states. 2In Appendix B, we report differences in how risk is shared by groups of states constructed using income designations, and how it is shared by groups of states constructed using rural and urban designations. 3In his classic contribution on optimal currency areas, Mundell (1961) explains how heterogeneous economic structures imply idiosyncratic shocks; and, without sufficient channels for risk sharing, the corresponding asynchronicity undermines a currency or monetary union
Summary
Along with concerns over migration and fiscal transfers, raise questions about how macroeconomic risks are able to be shared within a monetary union. Our goal is to determine whether and how risk sharing survives amid political differences.2 This determination is critical for assessing the viability of monetary unions, such as–most notably–the Euro Area, where political differences such as those observed in the United States are apparent.. New data allow us to examine the role of risk-sharing channels not yet explored year-by-year within the United States. In addition to exploring these new channels, we use the BEA consumption data to reexamine the important fiscal and financial channels studied with only retail sales data in the past, and to assess how these and the other channels differ where political preferences differ. Our findings indicate that–despite its own internal political and economic divisions, including differences in how risk sharing is achieved–the United States still provides a benchmark of integration within a monetary union.
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