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Risk Sharing among OECD and EU Countries: The Role of Capital Gains, Capital Income, Transfers, and Saving

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  • Balli, Faruk
  • Sorensen, Bent E.

Abstract

We estimate the amount of income and consumption smoothing (risk sharing) between OECD countries during the period 1970{2003 with a particular focus on EU and EMU countries. Income smoothing from international factor income has increased in the EU and, in particular, the EMU but not in the non-EU OECD since the introduction of the Euro. Consumption smoothing from pro-cyclical government saving has declined in the EMU, but not in the non-EU OECD, since the signing of the Maastricht treaty. We find that when capital gains and losses on international asset positions are considered part of income, the magnitude of capital gains leads to huge amounts of income smoothing and dis-smoothing although, at the time horizons we examine, the capital gains or losses are only weakly reflected in consumption. Understanding the role of capital gains in risk sharing appears to be of first order importance.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10223.

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Date of creation: 02 Dec 2007
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Handle: RePEc:pra:mprapa:10223

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Keywords: Government De¯cits; Income Insurance; International Capital Markets; International Integration; Risk Sharing; External Capital Gains;

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Cited by:
  1. Balli, Faruk & Balli, Hatice O., 2010. "Income and consumption smoothing and welfare gains across Pacific Island countries: The role of remittances and foreign aid," MPRA Paper 29547, University Library of Munich, Germany, revised 24 Feb 2011.
  2. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sorensen, 2008. "Risk sharing and portfolio allocation in EMU," European Economy - Economic Papers 334, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Balli, Faruk & Louis, Rosmy J. & Osman, Mohammad, 2008. "International Portfolio Allocation and Income Smoothing: Evidence from Recent Changes in Euro Region," MPRA Paper 10160, University Library of Munich, Germany.

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