In addition, recent analysis by ECB staff suggests that the extent of international risk sharing plays a key role in shaping the real effects of monetary policy shocks in euro area regions. In particular, a monetary policy tightening is associated with a stronger output contraction, the lower is the degree of risk sharing in a region.
Moreover, regions with a higher degree of risk sharing are less prone to persistent economic effects of interest rate changes (Chart 3): while output in regions with minimum risk sharing remains around 1.5 percentage points below its initial level five years after a monetary policy tightening shock, it fully recovers over this period in regions with maximum risk sharing.