I propose a novel channel of international risk sharing: the common currency channel. I theoretically show how the central bank of a currency union can use the common currency to insure member countries against consumption risk from idiosyncratic productivity shocks. A trade-off between risk sharing and moral hazard emerges: a central bank which enables risk sharing induces countries to free ride on each other's production efforts. I study this trade-off and derive rules for a central bank striking the optimal balance between insurance and incentives. Monetary policy determines current account imbalances that are financed through the central bank rather than through the transfer of marketable assets. Optimal policy is contingent on the realization of aggregate production and on the severity of the underlying moral hazard friction. Revisiting European Central Bank policies during the Eurocrisis between 2008 and 2014, I interpret the buildup of TARGET2 balances as risk sharing through the common currency. I find that the common currency channel accounts for up to 60% of risk sharing among Eurozone countries in the early stages of the Eurocrisis. I conclude that the common currency can be a substitute for risk sharing through fiscal integration.
International climate policy risk spillovers arise when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We develop an event study procedure that allows us to identify such spillovers in emission trading systems. Using our methodology to test for climate policy risk spillovers from the United States (US) to the European Union (EU), we find that financial markets expect EU regulators to follow the direction of US climate policy. Our results highlight the importance of regulatory risk spillovers in the context of global climate policy coordination.
Knowledge-Based Borrowing Constraints (with Christoph Carnehl)
The Welfare Effects of Protectionist Climate Policy (with Saumya Deojain)
Did Shale Gas Green the US Economy? (with Samuel Selent)
The Pulse of the Euro: European Monetary Integration and Business Cycle Dynamics
The sociological literature suggests that within diverse communities, individuals create externalities on each other when they express their identity through the consumption of market goods. We present a model in which local governments use taxation and individuals adjust their social networks to address these identity expression externalities. Our framework enables us to explore the impact of diversity on social networks and taxation, and how the presence of a tax response to identity expression externalities influences network choice. We find that taxation and network adjustments act as strategic complements or substitutes, depending on individuals' preferences for out-group identity expression. Taxes imposed to regulate identity expression externalities either amplify or dampen the network response to such externalities. We analyze US city data on ethnic diversity, taxation, and segregation as outcomes influenced by identity expression externalities that are addressed through local tax policies and network choices.