This paper develops a new framework for studying the determinants of the patterns of international consumption risk sharing based on sectoral macroeconomic data for the eurozone economies. For each sector—households, firms, financial sector, government and rest of the world—changes in income flows and balance sheet items in proportion to changes in output are calculated and their contribution to households consumption smoothing evaluated. Income flows are stabilized via capital markets through international portfolio diversification, while balance sheets facilitate risk sharing via credit markets—domestic and international—directly via adjustments in household leverage and indirectly via stabilizing income streams to households, primarily from firms. Furthermore, governments directly affect disposable income of all sectors via net transfers and collective consumption expenditure, by adjusting the level and composition of public liabilities. Conversely, traditional measures of channels of international risk sharing solely rely on transactions with the rest of the world and thus mask important interactions and frictions between different sectors in the economy. Empirically, I document significant time and geographic variation in contribution of each channel and sector, in particular in times of the Great Recession and the European sovereign debt crisis. Furthermore, I separately explore how risk is shared in response to valuation gains/losses that directly affect sectoral balance sheets independent of active saving decisions. Finally, the main theoretical contribution of the paper lies in extending the existing business cycle accounting methodology to allow for a structural interpretation of the findings. Estimated wedges capture in reduced form both sources of shocks and frictions that hinder perfect risk sharing. By switching wedges off and on one at a time, channels of risk sharing are re-estimated and deviations from the baseline case are interpreted to capture the importance of each wedge for a particular risk sharing channel.

Sectoral Accounts And Macroeconomic Risk Sharing (2019)

Draft coming soon


We study channels of risk sharing in the EMU before and after 2008, when the Great Recession started. Empirically, higher cross-border equity holdings and more direct bank-to-nonbank lending are associated with more risk sharing while interbank integration is not. Equity market integration in the EMU remains limited while banking integration is dominated by interbank integration. Further, interbank integration proved to be highly procyclical, which contributed to a freeze in risk sharing after 2008. Based on this evidence, and results from simulations of a stylized DSGE model, we discuss implications for banking union. Our results show that direct banking integration and capital market integration are complements and that robust risk sharing in the EMU requires integration on both fronts.

Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve?

with Mathias Hoffmann, Bent Sørensen, and Iryna Stewen

IMF Economic Review, September 2019, Volume 67, Issue 3 (The Euro at 20), pp 443–495

Available at:


Small businesses (SMEs) depend on banks for credit. We show that the severity of the Eurozone crisis was worse in countries that borrowed more from domestic banks ("domestic bank dependence") compared with countries that borrowed more from international banks. Eurozone banking integration in the years 2000-2008 involved cross-border lending between banks while foreign banks' lending to the real sector stayed flat. Hence, SMEs remained dependent on domestic banks and were vulnerable to global banking sector shocks. We confirm, using a calibrated quantitative model, that domestic bank dependence makes sectors and countries with many SMEs vulnerable to global banking shocks.

Small Firms and Domestic Bank Dependence in Europe’s Great Recession

with Mathias Hoffmann, and Bent Sørensen

CEPR Discussion Paper No. DP13691

Available at:

We study the effects of the U.S. banking deregulation on the sensitivity of state-level real estate prices to local shocks. In particular, we show that financial market liberalization induces a rise in house prices, because it causes an endogenous drop in housing risk premia and at the same time improves interregional risk sharing. We also estimate a cointegrating vector in a panel setting between consumption, housing assets, and income and construct a housing distress factor as a cointegrating residual, varying across time and states. This factor possesses considerable forecasting power with respect to future housing returns on a horizon of up to four years, which disappears once states liberalize their banking markets. The latter finding is consistent with the view that state-level banking deregulation improved interstate risk sharing and caused local house prices to co-vary more across states, thus making local markets more exposed to aggregate price shocks and less exposed to local economic fluctuations.

Housing Risk Premia and State-Level Banking Deregulation

with Mathias Hoffmann

Draft available soon


Banking integration in the EMU. Let’s get real! (2019)

with Mathias Hoffmann, Bent Sørensen, and Iryna Stewen column

Shocks and risk sharing in the EMU: Lessons for Banking and Capital Market Union (2018)

with Mathias Hoffmann, Bent Sørensen, and Iryna Stewen

In N. Campos & J.-E. Sturm (Eds.), Bretton Woods, Brussels, and Beyond: Redesigning the Institutions of Europe (pp. 85-92). book

Financial Times (Martin Sandbu, Free Lunch, June 28, 2018). Understanding how a single currency works. 

Manuscript citation of Hoffmann, M., Maslov, E., Sørensen, B., & Stewen, I. (2018). Are Banking and Capital Markets Union Complements? Evidence from Channels of Risk Sharing.

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