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Financial Globalization, International Business Cycles and Consumption Risk Sharing

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  • Artis, Michael J
  • Hoffmann, Mathias

Abstract

Consumption based measures of international risk sharing seem to defy the effects of more than two decades of ongoing financial globalization. We put forward an explanation of this puzzle: under incomplete risk sharing and if there are several sources of risk, consumption based measures of risk sharing will also be a function of the structure of business cycles, i.e. their degree of synchronization and persistence. We argue that permanent and transitory shocks to output constitute such qualitatively different sources of risk. Using OECD data, we then illustrate that countries have indeed become more insured against permanent shocks, in line with the ever better integration of financial markets. Basic measures of risk sharing have however not picked up this change because globalization has also affected the structure of business cycles. In particular, our results are consistent with the observation recently made by several authors that the globalization period has seen the emergence of less volatile and internationally more synchronized business cycles among industrialized countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4697.

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Date of creation: Oct 2004
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Handle: RePEc:cpr:ceprdp:4697

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Keywords: capital flows; consumption risk sharing; home bias; international and regional business cycles;

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  1. Yan Bai & Jing Zhang, 2009. "Financial Integration and International Risk Sharing," Working Papers 594, Research Seminar in International Economics, University of Michigan.
  2. Vincent Labhard & Michael Sawicki, 2006. "International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD," Bank of England working papers 302, Bank of England.
  3. Jonathan Heathcote & Fabrizio Perri, 2001. "Financial Globalization and Real Regionalization," Working Papers 01-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Becker, Sascha O. & Hoffmann, Mathias, 2006. "Intra- and international risk-sharing in the short run and the long run," European Economic Review, Elsevier, vol. 50(3), pages 777-806, April.
  5. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  6. P J Perez & D R Osborn & M Artis, 2003. "The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks," Centre for Growth and Business Cycle Research Discussion Paper Series 37, Economics, The Univeristy of Manchester.
  7. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Consumption and labor supply with partial insurance: an analytical framework," Staff Report 432, Federal Reserve Bank of Minneapolis.
  8. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1081-1110, November.
  9. Imbs, Jean, 2004. "The Real Effects of Financial Integration," CEPR Discussion Papers 4335, C.E.P.R. Discussion Papers.
  10. Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
  11. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
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