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 levels of smoothing . We find that 39 percent of shocks to gross state product are smoothed by capital markets , 13 percent are smoothed by the federal government , and 23 percent are smoothed by credit markets . The remaining 25 percent are not smoothed. We also decompose the federal government smoothing into subcategories: taxes, transfers, and grants to states.