An Assessment of Regional Risk Sharing in Italy and the United Kingdom

We investigate what amount of risk sharing European countries entering a monetary union can hope to achieve by looking at the regions of Italy and the UK: two countries with very different financial systems and policy regimes. More precisely, we measure the contribution to risk sharing stemming from a) cross-ownership of productive and financial assets, b) government tax-transfer system, and c) portfolio adjustments by agents through lending and borrowing on credit markets. We find that both the extent of risk sharing and the relative weights of various channels in the two countries differ meaningfully, with a major role played by the State in the case of Italy. Moreover, the smoothing patterns seem to vary according to the persistency of shocks