Does a Curren y Union Need a Capital Market Union?

We study (cid:28)nan ial linkages and risk sharing in four types of urren y unions: segmented markets; a banking union; a apital market union; and omplete (cid:28)nan ial markets. We analyze how these e onomies respond to various sho ks. Broadly speaking, we (cid:28)nd that a banking union is e(cid:30) ient at sharing demand sho ks (deleveraging, (cid:28)s al onsolidation), while a apital market union is ne essary to share supply sho ks (in luding quality/te hnology sho ks). We present theoreti al results where either type of union an exa tly repli ate the omplete market allo ation, as well as alibration of welfare gains. as equity laims. They (cid:28)nd that ountries using real Instead we onsider trading We show from and (2009) who show that agents an hedge risks through a stati forward in foreign ex hange.

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