Ricerc@Sapienza

Over the last years, a large body of literature has investigated the ability of member countries (or regions) of a monetary union to share part of their idiosyncratic risks with the rest of the group. The question is particularly relevant, as country specific shocks of different nature might put pressure on the fixed exchange rate, undermining the sustainability of the union. On the one hand, standard Optimal Currency Area (OCA) theories look at the costs and benefits that countries face when they decide to join a monetary union. The risk sharing approach, on the other hand, looks at group of countries in a monetary union as part of an insurance pool. In this sense, some degree of heterogeneity in the economic structures becomes an asset, as different countries will be exposed to different shocks and this would increase the possibilities of risk mutualisation.

While both approaches look at financial markets only as channel of risk absorption, a growing literature is looking at financial shocks as a driver for real economic variables. What I argue is that the available methodology, while having indisputable merits, is not able to properly identify the different shocks to which economies are exposed and the spillovers of disturbances across countries. Moreover, focusing on exogenous shocks to GDP, it fails to capture the disturbances originated in the financial sector. To fill this gap, my aim is to set a link between the recent literature on financial shocks and the one on risk sharing in monetary unions. What I propose is an extension of the standard method, which is able to properly identify financial shocks and how the different absorption mechanisms react to them.