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Consumption risk-sharing across G-7 countries

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  • Giovanni P. Olivei

Abstract

An intensely debated issue in international economics concerns the extent to which investors exploit the benefits from international trade in financial assets. Such benefits have long been acknowledged in theory but, despite the continuing process of financial integration and globalization, it is unclear whether they are fully exploited in actual practice. ; This article reexamines some of the evidence concerning the degree to which international financial markets help countries diversify away country-specific risks to achieve a mutually preferable allocation of consumption. By looking at national consumption correlations across G-7 countries, the author investigates whether greater incentives to diversify risks internationally have been accompanied by an effective increase in consumption risk-sharing. He finds that the apparent lack of consumption risk-sharing found in prior studies continued to persist in the 1990s and that the puzzle of low international consumption correlations is probably worse than usually thought. The author then considers alternative explanations for the puzzle and proposals to achieve a better degree of international risk-sharing.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2000)
Issue (Month): Mar ()
Pages: 3-14

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Handle: RePEc:fip:fedbne:y:2000:i:mar:p:3-14

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Keywords: Risk ; International finance ; Financial markets;

References

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  1. van Wincoop, Eric, 1999. "How big are potential welfare gains from international risksharing?," Journal of International Economics, Elsevier, vol. 47(1), pages 109-135, February.
  2. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  3. Michael R. Pakko, 1994. "Characterizing cross-country consumption correlations," Working Papers 1994-026, Federal Reserve Bank of St. Louis.
  4. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
  5. Portes, Richard & Rey, Hélène, 1999. "The Determinants of Cross-Border Equity Flows," CEPR Discussion Papers 2225, C.E.P.R. Discussion Papers.
  6. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
  7. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
  8. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
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Cited by:
  1. Schüler, Martin & Heinemann, Friedrich, 2002. "How integrated are the European retail financial markets? A cointegration analysis," Research Notes 3b, Deutsche Bank Research.
  2. Carlos Fonseca Marinheiro, 2003. "Output Smoothing in EMU and OECD: Can We Forego Government Contribution? A Risk Sharing Approach," CESifo Working Paper Series 1051, CESifo Group Munich.
  3. Gilbert Koenig & Irem Zeyneloglu, 2012. "International consumption risk sharing and fiscal policy," Economics Bulletin, AccessEcon, vol. 32(2), pages 1250-1260.
  4. Majumder, Neeta & Majumder, Debasish, 2002. "Measuring income risk to promote macro markets," Journal of Policy Modeling, Elsevier, vol. 24(6), pages 607-619, October.
  5. Cavaliere, Giuseppe & Fanelli, Luca & Gardini, Attilio, 2006. "Regional consumption dynamics and risk sharing in Italy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 525-542.

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