Risk sharing in currency unions: The migration channel

Abstract

International risk sharing insulates consumption from country-specific business-cycle fluctuations. This matters for countries in currency unions who lack monetary autonomy. In the spirit of Mundell (1961), we formally integrate migration as a distinct channel into the standard framework used to quantify risk sharing. For the US we find that interstate migration absorbs about 10 percent of the fluctuations in state-level output, for the euro area the corresponding number is 5 percent, consistent with the fact that migration rates are about 15 times higher in the US. The overall amount of risk sharing in the US is approximately three times as high.