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On The Empirics Of International Smoothing

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Author Info
Pierfederico Asdrubali (John Cabot University)
Soyoung Kim () (Department of Economics, Korea University)

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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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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
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Handle: RePEc:iek:wpaper:0724

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Related research
Keywords: Panel Data; Risksharing; Intertemporal Smoothing;

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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  1. Philip Lane, 2001. "Do international investment income flows smooth income?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(4), pages 714-736, December. [Downloadable!] (restricted)
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  2. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial integration in East Asia," Working Paper Series 2007-30, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
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