Risk Sharing in a Politically Divided Monetary Union

We examine business cycle divergence and risk-sharing channels within the United States as a whole and in U.S. ‘regions’ whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We find: (1) state busi-ness cycle divergence exceeds international divergence and is starkest–and growing–across Blue and Red regions; (2) risk sharing mechanisms, including fiscal flows and migration, differ across political regions; and (3) allowing for migration, real exchange rate adjustment through prices, and durable good purchases, overall risk sharing is high–even across the political divide, and even where fiscal flows are minimal.