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On the empirics of international smoothing

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  • Asdrubali, Pierfederico
  • Kim, Soyoung

Abstract

By fully exploiting the statistical properties of panel data, this paper improves upon existing methodologies to estimate consumption smoothing at least in three respects. First, we model explicitly incomplete risksharing as well as incomplete intertemporal smoothing, and couch the two mechanisms in a unified framework. Second, we fully exploit simple panel data analysis in order to measure degrees of both risksharing and intertemporal smoothing taking place in a given set of economic regions. In particular, we are able to measure not only the smoothing of idiosyncratic shocks, but also the dependence on aggregate (non-diversifiable) shocks. Third, we distinguish neatly between the effects of temporary vs. permanent shocks. This can be done by taking advantage of the complementarity between the "within" estimator and the "between" estimator in a panel regression. We apply the above methodology to a panel of 23 OECD countries in the period from 1955 to 2005. The main finding is consistent with the puzzle of negligible international risksharing, as domestic consumption growth - once properly analyzed - does not depend on aggregate income growth. Our analysis shows that industrial countries have tended to absorb output shocks mostly through intertemporal smoothing. About 25% of all temporary shocks are smoothed this way, while a comparable fraction of permanent shocks determine consumption growth.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 374-381

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:3:p:374-381

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Citations

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Cited by:
  1. Faruk Balli & Syed Basher & Rosmy Jean Louis, 2012. "Channels of risk-sharing among Canadian provinces: 1961–2006," Empirical Economics, Springer, Springer, vol. 43(2), pages 763-787, October.
  2. Asdrubali, Pierfederico & Kim, Soyoung, 2004. "Dynamic risksharing in the United States and Europe," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(4), pages 809-836, May.
  3. Huang, Pinghsun & Zhang, Yan & Deis, Donald R. & Moffitt, Jacquelyn S., 2009. "Do artificial income smoothing and real income smoothing contribute to firm value equivalently?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(2), pages 224-233, February.
  4. Pierfederico Asdrubali & Soyoung Kim, 2008. "Incomplete Intertemporal Consumption Smoothing and Incomplete Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(7), pages 1521-1531, October.
  5. Julan Du & Qing He & Oliver M. Rui, 2011. "Channels of Interprovincial Risk Sharing in China," Working Papers 122011, Hong Kong Institute for Monetary Research.
  6. Du, Julan & He, Qing & Rui, Oliver M., 2011. "Channels of Interprovincial Consumption Risk Sharing in the People’s Republic of China," ADBI Working Papers, Asian Development Bank Institute 334, Asian Development Bank Institute.
  7. Philip Lane, 2001. "Do international investment income flows smooth income?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 137(4), pages 714-736, December.
  8. Pierfederico Asdrubali & Soyoung Kim, 2005. "Consumption Smoothing Channels in Open Economies," International Finance, EconWPA 0506009, EconWPA.
  9. Hiroshi Fujiki & nd Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," IMES Discussion Paper Series 07-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Becker, Sascha O. & Hoffmann, Mathias, 2010. "Equity fund ownership and the cross-regional diversification of household risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(1), pages 90-102, January.
  11. Bouwman, Christa H.S., 2014. "Managerial optimism and earnings smoothing," Journal of Banking & Finance, Elsevier, Elsevier, vol. 41(C), pages 283-303.
  12. Li, Jia, 2012. "On the Empirics of China's Inter-regional Risk Sharing," MPRA Paper 37805, University Library of Munich, Germany.

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