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International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD

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  • Vincent Labhard
  • Michael Sawicki

Abstract

'Consumption risk sharing' refers to the ability of agents to insure or protect their consumption against shocks to their income, for example, by borrowing and lending or holding claims on foreign equity. So measuring the extent of risk sharing informs us about how consumption is likely to respond to country or region-specific shocks to income. This paper presents the evidence for consumption risk sharing by UK consumers, both across regions of the United Kingdom (intranationally) and between the United Kingdom and other countries (internationally). The main motivation for collecting this evidence is to establish to what extent UK consumers insure against income risks, and whether they do so to the same extent intranationally and internationally. Such evidence can tell us whether risk sharing functions effectively as an absorber of country or region-specific shocks in the United Kingdom. We find that there is more risk sharing across the UK regions than between the United Kingdom and other OECD countries. To test the robustness of our conclusions, we document the evidence for risk sharing using recent econometric techniques, which allow explicitly for country or region-specific factors impacting on consumption and output, including measurement errors in the data. We find that our results remain robust when we account for the possible impact of measurement error and preference shocks, and are consistent with results reported in the existing literature. Additionally, our paper also makes a separate contribution to the literature by illustrating the role of the choice of deflators in estimating the true extent of risk sharing for the United Kingdom and OECD. In terms of the channels through which risk sharing occurs, we find that the main mechanism of regional risk sharing operates via cross-regional asset holdings. Internationally, the main source of income smoothing comes from international borrowing and lending.

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Paper provided by Bank of England in its series Bank of England working papers with number 302.

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Date of creation: Jul 2006
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Handle: RePEc:boe:boeewp:302

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  1. Jacques Mélitz & Frédéric Zumer, 2000. "Interregional and International Risk Sharing and Lessons for EMU," EUI-RSCAS Working Papers 2, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  2. Sascha O. Becker & Mathias Hoffmann, 2003. "Intra-and International Risk-Sharing in the Short Run and the Long Run," CESifo Working Paper Series 1111, CESifo Group Munich.
  3. Kalemli-Ozcan, S. & Sorensen, B.E. & Yosha, O., 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," Papers 16-99, Tel Aviv.
  4. Imbs, Jean, 2004. "The Real Effects of Financial Integration," CEPR Discussion Papers 4335, C.E.P.R. Discussion Papers.
  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  6. Hess, Gregory D. & Shin, Kwanho, 1998. "Intranational business cycles in the United States," Journal of International Economics, Elsevier, vol. 44(2), pages 289-313, April.
  7. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  8. Asdrubali, Pierfederico & Kim, Soyoung, 2004. "Dynamic risksharing in the United States and Europe," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 809-836, May.
  9. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  10. Mario J Crucini & Gregory D Hess, 1999. "International and Intranational Risk Sharing," CESifo Working Paper Series 227, CESifo Group Munich.
  11. Michael ARTIS & Mathias HOFFMANN, 2003. "Home Bias and the Structure of International and Regional Business Cycles," Economics Working Papers ECO2003/15, European University Institute.
  12. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, vol. 45(2), pages 211-238, August.
  13. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  14. Bent E. Sørensen & Oved Yosha, 2007. "Producer Prices versus Consumer Prices in the Measurement of Risk Sharing," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(1), pages 3-17.
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  16. Del Negro, Marco, 2002. "Asymmetric shocks among U.S. states," Journal of International Economics, Elsevier, vol. 56(2), pages 273-297, March.
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Cited by:
  1. Artis, Michael J & Hoffmann, Mathias, 2004. "Financial Globalization, International Business Cycles and Consumption Risk Sharing," CEPR Discussion Papers 4697, C.E.P.R. Discussion Papers.
  2. Michael Artis, 2006. "What Do we Now Know About Currency Unions?," Economie Internationale, CEPII research center, issue 107, pages 9-28.
  3. Barbara Pfeffer, 2008. "Do regional Trade and Specialization drive intra-regional Risk-Sharing?," MAGKS Papers on Economics 200813, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Viktoria Hnatkovska & Michael Devereux, 2009. "International and Intra-national Real Exchange Rates: Evidence and Theory," 2009 Meeting Papers 1213, Society for Economic Dynamics.
  5. Agustin Benetrix, 2010. "International Risk Sharing and the Irish Economy," The Institute for International Integration Studies Discussion Paper Series iiisdp343, IIIS.

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