What Can Explain the Apparent Lack of International Consumption Risk Sharing?

No 5203, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent research in international business cycles based upon complete markets has found that international consumption correlations are lower than predicted by the standard risk-sharing implications of these models. In this paper, I use regression tests to ask whether two different types of explanations can help explain this result. First, I consider whether non-separabilities between tradeables and non-tradeable leisure or goods can explain the puzzle. Surprisingly, non-separabilities explain only a tiny fraction of the variation in tradeables consumption across countries. Furthermore, risk-sharing in tradeables is rejected. Second, I examine the effects of capital market restrictions on aggregate consumption risk-sharing by countries. While rejections of risk-sharing are stronger for countries facing more severe capital market restrictions, risk-sharing is still rejected for the unrestricted group of countries. Therefore, risk-sharing does not appear to be resolved by either explanation alone. However, when I allow for both non-separabilities and certain market restrictions, risk-sharing among unrestricted countries is not rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk-sharing across countries.

Date: 1995-08
Note: IFM AP
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Citations: View citations in EconPapers (8)

Published as Journal of Political Economy, April 1996, vol.104, pp.267-297.

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Journal Article: What Can Explain the Apparent Lack of International Consumption Risk Sharing? (1996)
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