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Income and consumption smoothing and welfare gains across Pacific Island countries: The role of remittances and foreign aid

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  • Balli, Faruk
  • Balli, Hatice O.

Abstract

We examine the potential welfare gains and channels of income smoothing for Pacific Island Countries (PICs) and nd that, under full risk sharing overall welfare gains across all PICs (particularly, Kiribati, Palau, and Papua New Guinea) are at desirable levels. However, for Australia, the potential welfare gain from risk sharing is almost similar to the gain it obtains if Australia attains full risk sharing with the rest of the OECD countries or with New Zealand alone. We also break down output using the framework of Sorensen and Yosha (1998) to quantify the extent and channels of risk sharing across PICs. For PICs, income-smoothing channels (net factor income and current transfers) play a significant role in buffering the output shock compared to the performance of those channels on smoothing the output shock for OECD countries. Domestic savings also smooth a fair portion of shocks to output, but the extent is much lower compared to that of OECD countries. Further, we analyze the effect of remittances and foreign aid on income smoothing for the PICs exclud- ing Australia and New Zealand. Income smoothing via remittances is highly volatile and significant in recent years, while foreign aid seems to be a stronger and more stable channel for smoothing domestic output shocks for PICs.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29547.

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Date of creation: 01 Mar 2010
Date of revision: 24 Feb 2011
Handle: RePEc:pra:mprapa:29547

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Keywords: Foreign Aid; Remittance In ows; International Integration; Income Smoothing; Consumption Smoothing; Pacic Island Countries; Welfare Gains from Risk Sharing;

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Citations

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Cited by:
  1. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.
  2. Christian E. Weller & Ghazal Zulfiqar, 2013. "Financial Market Diversity and Macroeconomic Stability," Working Papers wp332, Political Economy Research Institute, University of Massachusetts at Amherst.
  3. Faruk Balli & Faisal Rana, 2014. "Determinants of risk sharing through remittances: cross-country evidence," CAMA Working Papers 2014-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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