Channels of risk-sharing among Canadian provinces: 1961–2006

This article incorporates recent developments in the literature to quantify the amount of interprovincial risk-sharing in Canada. We find that 29% of shocks to gross provincial product are smoothed by capital markets , 27% are smoothed by the federal tax-transfer systems , and about 24% are smoothed by credit markets . The remaining 20% are not smoothed. Our results bring to light the critical role that Alberta plays in trading-off credit market smoothing for more capital market risk-sharing with the rest of Canada. Our pairwise risk-sharing analysis has brought up some interesting questions and arguments that are often neglected in discussions of regional risk-sharing. For example, one aspect of the pairwise analysis sheds light on the assessment of the economic effects of Quebec separation.