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On The Empirics Of International Smoothing

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  • Pierfederico Asdrubali

    (John Cabot University)

  • Soyoung Kim

    ()
    (Department of Economics, Korea University)

Abstract

By fully exploiting the statistical properties of panel data, this paper improves upon existing methodologies to estimate consumption smoothing at least in three respects. First, we model explicitly incomplete risksharing as well as incomplete intertemporal smoothing, and couch the two mechanisms in a unified framework. Second, we fully exploit simple panel data analysis in order to measure degrees of both risksharing and intertemporal smoothing taking place in a given set of economic regions. In particular, we are able to measure not only the smoothing of idiosyncratic shocks, but also the dependence on aggregate (non-diversifiable) shocks. Third, we distinguish neatly between the effects of temporary vs. permanent shocks. This can be done by taking advantage of the complementarity between the ¡°within¡± estimator and the ¡°between¡± estimator in a panel regression. We apply the above methodology to a panel of 23 OECD countries in the period from 1955 to 2005. The main finding is consistent with the puzzle of negligible international risksharing, in line with the results of S©ªrensen and Yosha (1998), and despite the use of a different data source. Our analysis shows that industrial countries have tended to absorb output shocks mostly through intertemporal smoothing. About 25% of all temporary shocks are smoothed this way, while a comparable fraction of permanent shocks determine consumption growth.

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Bibliographic Info

Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 0724.

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Length: 19 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:iek:wpaper:0724

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Keywords: Panel Data; Risksharing; Intertemporal Smoothing;

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  1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Pierfederico Asdrubali & Soyoung Kim, 2007. "Consumption Smoothing Channels in Open Economies," Discussion Paper Series, Institute of Economic Research, Korea University 0723, Institute of Economic Research, Korea University.
  2. Asdrubali, Pierfederico & Kim, Soyoung, 2004. "Dynamic risksharing in the United States and Europe," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(4), pages 809-836, May.
  3. Becker, Sascha O. & Hoffmann, Mathias, 2010. "Equity fund ownership and the cross-regional diversification of household risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(1), pages 90-102, January.
  4. Julan Du & Qing He & Oliver M. Rui, 2011. "Channels of Interprovincial Risk Sharing in China," Working Papers, Hong Kong Institute for Monetary Research 122011, Hong Kong Institute for Monetary Research.
  5. Pierfederico Asdrubali & Soyoung Kim, 2005. "Incomplete Intertemporal Consumption Smoothing and Incomplete Risksharing," International Finance, EconWPA 0506010, EconWPA.
  6. Balli, Faruk & Basher, Syed Abul & Jean Louis, Rosmy, 2011. "Channels of risk-sharing among Canadian provinces: 1961--2006," MPRA Paper 30876, University Library of Munich, Germany.
  7. Bouwman, Christa H.S., 2014. "Managerial optimism and earnings smoothing," Journal of Banking & Finance, Elsevier, Elsevier, vol. 41(C), pages 283-303.
  8. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial integration in East Asia," Working Paper Series, Federal Reserve Bank of San Francisco 2007-30, Federal Reserve Bank of San Francisco.
  9. Lane, Philip R., 1999. "Do International Investment Income Flows Smooth Income?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2123, C.E.P.R. Discussion Papers.
  10. Du, Julan & He, Qing & Rui, Oliver M., 2011. "Channels of Interprovincial Consumption Risk Sharing in the People’s Republic of China," ADBI Working Papers, Asian Development Bank Institute 334, Asian Development Bank Institute.
  11. Huang, Pinghsun & Zhang, Yan & Deis, Donald R. & Moffitt, Jacquelyn S., 2009. "Do artificial income smoothing and real income smoothing contribute to firm value equivalently?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(2), pages 224-233, February.
  12. Li, Jia, 2012. "On the Empirics of China's Inter-regional Risk Sharing," MPRA Paper 37805, University Library of Munich, Germany.

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