This paper estimates the degree of consumption risk sharing and analyzes the channels of consumption risk sharing among the ten East Asian countries. Estimation results show that a bulk of cross-sectional variance of GDP, about 80 percent, is not smoothed within the region, which suggests that the degree of consumption risk sharing is far from complete and very low in the region. Capital markets play a minimal role, and credit markets provide a positive but limited role. These results imply that market channels do not function well in smoothing idiosyncratic output shocks. To be consistent, we also find that potential welfare gains from consumption risk sharing within East Asia are quite large. Compared to OECD countries, the degree of risk sharing achieved is lower and potential gains are larger in East Asian countries, but the degree of risk sharing and the potential gains are similar in relatively more developed East Asian countries.
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Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number
303.
Length: 38 pages Date of creation: Dec 2003 Date of revision: Handle: RePEc:eab:financ:303
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Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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