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Financial Globalization, International Business Cycles and Consumption Risk Sharing

  • Michael J. Artis
  • Mathias Hoffmann

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that the fraction of idiosyncratic consumption risk that gets shared among industrialized countries has actually increased considerably over the period 1980-2000 and, in particular, during the 1990s-from around 30 to more than 60 percent. However, 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 because consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialized countries since the 1980s. First, the volatility of output at business-cycle frequencies has declined by more than has the volatility of permanent fluctuations. 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. Second, 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. Copyright � The editors of the "Scandinavian Journal of Economics" 2008 .

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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 110 (2008)
Issue (Month): 3 (09)
Pages: 447-471

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Handle: RePEc:bla:scandj:v:110:y:2008:i:3:p:447-471
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  1. Heathcote, Jonathan & Perri, Fabrizio, 2001. "Financial Globalization and Real Regionalization," Working Papers 01-05, Duke University, Department of Economics.
  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, vol. 111(4), pages 1081-1110, November.
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  7. 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.
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  10. Michael D. Bordo & Thomas Helbling, 2003. "Have National Business Cycles Become More Synchronized?," NBER Working Papers 10130, National Bureau of Economic Research, Inc.
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