Financial Integration and Consumption Smoothing
AbstractWe present a new empirical strategy for testing if financial integration improves risk sharing opportunities and consumption smoothing. Our test is based on a decomposition of the variance of consumption growth into a component that depends on the variance of permanent income shocks and one that depends on the variance of transitory shocks. We then test if the process of financial market integration and liberalization brought about by the introduction of the euro has made consumption less sensitive to income shocks in Italy. The paper makes a significant contribution also from a methodological point of view. We use panel data on income to identify non parametrically a time series of the variances of the income shocks. We then rely on repeated cross-sections of consumption and income to identify the degree of smoothing with respect to income shocks, and test if it has declined after the introduction of the euro. Our procedure does not require that consumption and income are available in the same panel data. It can therefore be applied in all countries in which repeated cross-sectional consumption data can be combined with panel data on income.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 121 (2011)
Issue (Month): 553 (06)
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- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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- Tullio Jappelli & Luigi Pistaferri, 2010.
"Does Consumption Inequality Track Income Inequality in Italy?,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 133-153, January.
- Tullio Jappelli & Luigi Pistaferri, 2009. "Does Consumption Inequality Track Income Inequality in Italy?," CSEF Working Papers 229, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Tullio Jappelli & Luigi Pistaferri, 2009. "Code and data files for "Does Consumption Inequality Track Income Inequality in Italy?"," Computer Codes 09-225, Review of Economic Dynamics.
- Chiara Binelli & Orazio Attanasio, 2010.
"Mexico in the 1990s: the Main Cross-Sectional Facts,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 238-264, January.
- Orazio Attanasio & Chiara Binelli, 2009. "Code and data files for "Mexico in the 1990s: the Main Cross-Sectional Facts"," Computer Codes 09-201, Review of Economic Dynamics.
- Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp272, IIIS.
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