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How does the sensitivity of consumption to income vary over time? international evidence

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  • Islamaj,Ergys
  • Kose,Ayhan
Abstract
This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. The paper examines the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. Two main results are reported. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, the regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics, and other controls, such as interest rates and outcome-based measures of financial integration. The paper also discusses other potential sources of the temporal changes in the sensitivity of consumption to income.

Suggested Citation

  • Islamaj,Ergys & Kose,Ayhan, 2016. "How does the sensitivity of consumption to income vary over time? international evidence," Policy Research Working Paper Series 7659, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7659
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    File URL: http://documents.worldbank.org/curated/en/309571468001185712/pdf/WPS7659.pdf
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    Cited by:

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    2. Dovchinsuren, Khaliun, 2023. "How does excessive volatility of consumption vary across countries?," Japan and the World Economy, Elsevier, vol. 67(C).
    3. Franziska Bremus & Malte Rieth, 2023. "Integrating Out Natural Disaster Shocks," Discussion Papers of DIW Berlin 2063, DIW Berlin, German Institute for Economic Research.
    4. Islamaj, Ergys & Kose, M. Ayhan, 2016. "How does the sensitivity of consumption to income vary over time? International evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 169-179.
    5. Peter Fuleky & Luigi Ventura & Qianxue Zhao, 2018. "Common correlated effects and international risk sharing," International Finance, Wiley Blackwell, vol. 21(1), pages 55-70, March.
    6. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    7. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Kym Anderson, 2016. "Agricultural Trade, Policy Reforms, and Global Food Security," Palgrave Studies in Agricultural Economics and Food Policy, Palgrave Macmillan, number 978-1-137-46925-0, November.

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    More about this item

    Keywords

    Consumption; Debt Markets; Inequality; Economic Theory&Research; Emerging Markets;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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