Interregional risk sharing and fiscal redistribution in unified Germany

This article provides empirical evidence of interregional risk sharing in unified Germany. The focus is on two related questions. First, to what extent do private institutions and the public sector provide insurance against idiosyncratic shocks to individual regions? Second, to what extent does the public sector reduce long-term differences between regions? While the federal government channel is not found to have a stabilising effect, private capital flows provide almost complete insurance against short-term shocks. In sharp contrast, the fiscal transfer system achieves a substantial reduction of long term disparities between regions. These results show that fiscal transfers in unified Germany are mainly concerned with redistribution in favor of depressed regions rather than providing insurance against idiosyncratic shocks.