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The Home Bias and Capital Income Flows between Countries and Regions

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  • Artis, Michael J.
  • Hoffmann, Mathias

Abstract

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other?s output (Shiller securities). This model allows us to identify the channels through which improvements in international risk sharing have come about. The model predicts crosscountry and cross-regional income flows with considerable precision. Both international income flows as well as consumption risk sharing have increased since 1990, in line with the gradual removal of country portfolio home bias documented elsewhere. Still, the increase in international income flows falls short of explaining all of the consumption risk sharing we see in international data. We show that heterogeneity in countries? gross foreign asset positions is important in explaining this result. While countries with less portfolio home bias enjoy better consumption risk sharing, our findings also suggest that heterogeneity in country portfolios opens an separate channel for consumption risk sharing, possibly through asymmetric valuation effects that have been emphasized in the recent literature. --

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Bibliographic Info

Paper provided by Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen in its series Technical Reports with number 2006,13.

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Date of creation: 2006
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Handle: RePEc:zbw:sfb475:200613

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Keywords: Consumption Risk Sharing; International and regional business cycles; Capital flows; Home Bias; Non-stationary panel data;

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  1. Michael J. Artis & Mathias Hoffmann, 2008. "Financial Globalization, International Business Cycles and Consumption Risk Sharing," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 110(3), pages 447-471, 09.
  2. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  3. Aart Kraay & Norman Loayza & Luis Servén, 2001. "Country portfolios," Working Papers Central Bank of Chile, Central Bank of Chile 91, Central Bank of Chile.
  4. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, Elsevier, vol. 119(1), pages 207-243, November.
  5. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 222-26, May.
  6. Obstfeld, Maurice, 2004. "External Adjustment," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt7bw468wx, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  7. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  8. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, Elsevier, vol. 45(2), pages 211-238, August.
  9. Imbs, Jean, 2006. "The real effects of financial integration," Journal of International Economics, Elsevier, Elsevier, vol. 68(2), pages 296-324, March.
  10. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report, Federal Reserve Bank of Minneapolis 146, Federal Reserve Bank of Minneapolis.
  11. Nelson C. Mark & Donggyu Sul, 2002. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand," NBER Technical Working Papers 0287, National Bureau of Economic Research, Inc.
  12. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1081-1110, November.
  13. Kose, M. Ayhan & Prasad, Eswar & Terrones, Marco E., 2007. "How Does Financial Globalization Affect Risk Sharing? Patterns and Channels," IZA Discussion Papers 2903, Institute for the Study of Labor (IZA).
  14. Becker, Sascha O. & Hoffmann, Mathias, 2006. "Intra- and international risk-sharing in the short run and the long run," European Economic Review, Elsevier, Elsevier, vol. 50(3), pages 777-806, April.
  15. Canova, Fabio & Ravn, Morten O., 1994. "International Consumption Risk Sharing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1074, C.E.P.R. Discussion Papers.
  16. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 67(5), pages 1057-1112, September.
  17. Philip Lane, 2001. "Do international investment income flows smooth income?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 137(4), pages 714-736, December.
  18. Hess, Gregory D. & Shin, Kwanho, 1998. "Intranational business cycles in the United States," Journal of International Economics, Elsevier, Elsevier, vol. 44(2), pages 289-313, April.
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Citations

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Cited by:
  1. Aidan Corcoran, 2008. "International Financial Integration and Consumption Risk Sharing," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp241, IIIS.
  2. Stefan Gerlach & Mathias Hoffmann, 2008. "The Impact of the Euro on International Stability and Volatility," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 309, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Michael Artis & Toshihiro Okubo, 2008. "The Intranational Business Cycle: Evidence from Japan," Centre for Growth and Business Cycle Research Discussion Paper Series 101, Economics, The Univeristy of Manchester.
  4. Thomas Nitschka, 2008. "The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate," IEW - Working Papers 385, Institute for Empirical Research in Economics - University of Zurich.
  5. repec:hae:wpaper:2013-3 is not listed on IDEAS
  6. Peter Fuleky & L Ventura & Qianxue Zhao, 2013. "Common correlated effects and international risk sharing," Working Papers, University of Hawaii at Manoa, Department of Economics 201304, University of Hawaii at Manoa, Department of Economics.
  7. Agustin Benetrix, 2010. "International Risk Sharing and the Irish Economy," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp343, IIIS.
  8. von Furstenberg, George M., 2004. "Consumption Smoothing Across States and Time: International Insurance vs. Foreign Loans," Discussion Paper Series 1: Economic Studies 2004,13, Deutsche Bundesbank, Research Centre.
  9. Thierry Bracke & Martin Schmitz, 2011. "Channels of international risk-sharing: capital gains versus income flows," International Economics and Economic Policy, Springer, vol. 8(1), pages 45-78, April.
  10. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers 376, Institute for Empirical Research in Economics - University of Zurich.
  11. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 258-270, July.
  12. Pierucci, Eleonora & Ventura, Luigi, 2012. "International risk sharing and globalization," MPRA Paper 35869, University Library of Munich, Germany.
  13. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, Springer, vol. 21(5), pages 705-730, November.
  14. Eleonora Pierucci & Luigi Ventura, 2011. "On international risk sharing and financial globalization: some gloomy evidence," Departmental Working Papers of Economics - University 'Roma Tre' 0124, Department of Economics - University Roma Tre.
  15. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2006. "Home bias in global bond and equity markets: the role of real exchange rate volatility," Working Paper Series, European Central Bank 0685, European Central Bank.

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