Debt Crises and Risk-Sharing: The Role of Markets versus Sovereigns

Using a variance decomposition of shocks to gross domestic product (GDP), we quantify the role of international factor income, international transfers, and saving in achieving risk-sharing during the recent European crisis. We focus on the subperiods 1990-2007, 2008-2009, and 2010 and consider separately the European countries hit by the sovereign debt crisis in 2010. We decompose risk-sharing from saving into contributions from government and private saving, and show that fiscal austerity programs played an important role in hindering risk-sharing during the sovereign debt crisis.