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Interstate Risk Sharing In Germany: 1970-2006

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Executive Summary

This paper studies the channels of interstate risk sharing in Germany for the time period 1970 to 2006 following the methodology of Asdrubali et al. (1996). Their framework allows one to estimate the degree of smoothing of a shock to a state's gross domestic product by factor markets, the government sector, and credit markets, respectively. For the time period from 1970 to 1994 - pre-unification Germany - the author finds that about 19 percent of shocks to a state's Gross Domestic Product (GDP) are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels changes.

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