Fiscal flows and financial markets: to what extent do they provide risk sharing in Sweden?

Abstract

The objective of this paper is to analyze the amount of risk sharing that takes place between regions in Sweden. Based on a similar empirical specification as suggested by ASDRUBALI et al., 1996, we find that the capital market is the largest source of risk sharing of an exogenous change in gross regional product in Sweden. Still, roughly 20 percent of a change in regional output is smoothed among the regions through the fiscal system. There is also some evidence that there are regional differences in the sense that regions located in the south rely more on the capital market as a source of insurance against shocks in output, while the tax and transfer systems provide a larger extent of risk sharing for regions located in the north.