Channels of Interstate Risk Sharing: United States 1963-1990

Abstract

We develop a framework for quantifying the amount of risk sharing among states in the United States, and construct data that allow us to decompose the cross-sectional variance in gross state product into several components which we refer to as <it>levels of smoothing</it>. We find that 39 percent of shocks to gross state product are smoothed by <it>capital markets</it>, 13 percent are smoothed by the <it>federal government</it>, and 23 percent are smoothed by <it>credit markets</it>. The remaining 25 percent are not smoothed. We also decompose the federal government smoothing into subcategories: taxes, transfers, and grants to states.