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Financial Globalization, International Business Cycles and Consumption Risk Sharing

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Author Info
Artis, Michael J
Hoffmann, Mathias

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

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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  1. Riezman, R.G. & Whiteman, C.H., 1991. "World Business Cycles," Working Papers 91-26, University of Iowa, Department of Economics.
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  1. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk Sharing, Finance and Institutions in International Portfolios," CEPR Discussion Papers 6496, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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