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Are Industrial-Country Consumption Risks Globally Diversified?

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  • Maurice Obstfeld.

Abstract

What idiosyncratic consumption risks can countries trade away on international asset markets? This paper develops an empirical methodology for answering the question. The tests are based on the proposition that in an integrated world asset market with representative national agents, the ex post difference between two countries' intertemporal marginal rates of substitution in consumption is uncorrelated with any random variable on which contractual payoffs can be conditioned. This result is applied to annual time-series data for the seven largest industrial countries over 1950-88. Of these countries, Germany seems to have been most successful at internationally diversifying its consumption risks.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Center for International and Development Economics Research (CIDER) Working Papers with number C93-014.

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Date of creation: 01 Mar 1993
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Handle: RePEc:ucb:calbcd:c93-014

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References

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  1. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
  2. Maurice Obstfeld, 1986. "How Integrated are World Capital Markets? Some New Tests," NBER Working Papers 2075, National Bureau of Economic Research, Inc.
  3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  4. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
  5. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  6. Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 3-16, February.
  7. Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
  8. repec:fth:calaec:16-92 is not listed on IDEAS
  9. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  10. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  11. repec:fth:calaec:16-90 is not listed on IDEAS
  12. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers 224, University of Rochester - Center for Economic Research (RCER).
  13. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  14. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  15. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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