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Financial Globalization, International Business Cycles, and Consumption Risk Sharing

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  • Michael J. Artis
  • Mathias Hoffmann

Abstract

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have been unable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 346.

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Date of creation: Dec 2007
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Handle: RePEc:zur:iewwpx:346

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Keywords: Consumption Risk Sharing; International Business Cycles; Great Moderation; Financial Integration and Capital Flows; Home Bias;

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  1. Imbs, Jean, 2004. "The Real Effects of Financial Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4335, C.E.P.R. Discussion Papers.
  2. 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.
  3. Jonathan Heathcote & Fabrizio Perri, 2001. "Financial Globalization and Real Regionalization," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 01-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
  5. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  6. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," NBER Working Papers 15257, National Bureau of Economic Research, Inc.
  7. Yan Bai & Jing Zhang, 2009. "Financial Integration and International Risk Sharing," Working Papers, Research Seminar in International Economics, University of Michigan 594, Research Seminar in International Economics, University of Michigan.
  8. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1887-1921, December.
  9. Sascha O. Becker & Mathias Hoffmann, 2003. "Intra-and International Risk-Sharing in the Short Run and the Long Run," CESifo Working Paper Series 1111, CESifo Group Munich.
  10. Vincent Labhard & Michael Sawicki, 2006. "International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD," Bank of England working papers, Bank of England 302, Bank of England.
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