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Financial Globalization, International Business Cycles and Consumption Risk Sharing

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Author Info
Michael J. Artis
Mathias Hoffmann

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Abstract

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that the fraction of idiosyncratic consumption risk that gets shared among industrialized countries has actually increased considerably over the period 1980-2000 and, in particular, during the 1990s-from around 30 to more than 60 percent. However, standard consumption-based measures of risk sharing-such as the volatility of consumption conditional on output or international consumption correlations-have been unable to detect this increase because consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialized countries since the 1980s. First, the volatility of output at business-cycle frequencies has declined by more than has the volatility of permanent fluctuations. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Second, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated. Copyright © The editors of the "Scandinavian Journal of Economics" 2008 .

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9442.2008.00546.x
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Article provided by Blackwell Publishing in its journal Scandinavian Journal of Economics.

Volume (Year): 110 (2008)
Issue (Month): 3 (09)
Pages: 447-471
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Handle: RePEc:bla:scandj:v:110:y:2008:i:3:p:447-471

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  1. Pot Erik & Flesch János & Peeters Ronald & Vermeulen Dries, 2009. "Dynamic Competition with Consumer Inertia," Research Memoranda 037, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Markus Leibrecht & Johann Scharler, 2009. "Banks, Financial Markets and International Consumption Risk Sharing," Economics working papers 2009-14, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
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  3. Akito Matsumoto & Robert P. Flood & Nancy P. Marion, 2009. "International Risk Sharing During the Globalization Era," IMF Working Papers 09/209, International Monetary Fund. [Downloadable!]
  4. Ventura, Luigi, 2008. "Risk sharing opportunities and macroeconomic factors in Latin American and Caribbean countries : A consumption insurance assessment," Policy Research Working Paper Series 4490, The World Bank. [Downloadable!]
  5. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk Sharing, Finance and Institutions in International Portfolios," CEPR Discussion Papers 6496, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers iewwp376, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  7. Markus Leibrecht & Johann Scharler, 2008. "Reconsidering Consumption Risk Sharing among OECD Countries: Some Evidence Based on Panel Cointegration," Open Economies Review, Springer, vol. 19(4), pages 493-505, September. [Downloadable!] (restricted)
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