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Financial integration and consumption risk sharing and smoothing

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  • Suzuki, Yui
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    Abstract

    While paying careful attention to the stochastic properties of income process, this paper tests the joint rational expectation and permanent income hypothesis (RE/PIH) to clarify how and to what degree financial integration delinks national income and consumption. It is shown that both the OECD and the non-OECD countries benefit from financial integration in terms of consumption risk sharing and smoothing. The RE/PIH for the transitory income is not rejected for the OECD countries suggesting full consumption smoothing. Regression results also support the RE/PIH prediction that financial integration delivers even larger increases in consumption responding to positive shocks to income growth.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1059056013000889
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 29 (2014)
    Issue (Month): C ()
    Pages: 585-598

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    Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:585-598

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Consumption risk sharing; Consumption smoothing; Financial integration; Permanent income; Transitory income;

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    Cited by:
    1. Donadelli, Michael & Paradiso, Antonio, 2014. "Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 206-220.
    2. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," CESifo Working Paper Series 4669, CESifo Group Munich.

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