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Consumption risk sharing and adjustment costs

Author

Listed:
  • Giuseppe Cavaliere

    () (University of Bologna)

  • Luca Fanelli

    () (University of Bologna)

  • Attilio Gardini

    () (University of Bologna)

Abstract

We show that full risk sharing may not be at odd with the idea that changes in regional consumption display error-correcting dynamics, in line with the idea that information and transaction costs stemming from interregional portfolio diversification and labor movements induced by permanent income shocks may delay the adjustment process. Using Italian data over the period 1960-2001 it is found that regional per capita consumptions match the proposed error-correcting structure.

Suggested Citation

  • Giuseppe Cavaliere & Luca Fanelli & Attilio Gardini, 2009. "Consumption risk sharing and adjustment costs," Economics Bulletin, AccessEcon, vol. 29(2), pages 1117-1126.
  • Handle: RePEc:ebl:ecbull:eb-09-00172
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    References listed on IDEAS

    as
    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. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, pages 571-608.
    3. Luca Dedola & Stefano Usai & Marco Vannini, 1999. "An assessment of regional risk sharing in Italy and the United Kingdom," Chapters,in: Economic Growth and Change, chapter 15 Edward Elgar Publishing.
    4. Jeffrey C. Fuhrer & Michael W. Klein, 2006. "Risky Habits: on Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 722-740, September.
    5. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, March.
    6. Canova, Fabio & Ravn, Morten O, 1996. "International Consumption Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 573-601, August.
    7. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
    8. Cavaliere, Giuseppe & Fanelli, Luca & Gardini, Attilio, 2006. "Regional consumption dynamics and risk sharing in Italy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 525-542.
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    10. Ravn, Morten O, 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers 2940, C.E.P.R. Discussion Papers.
    11. Maurice Obstfeld, 1993. "Are Industrial-Country Consumption Risks Globally Diversified?," NBER Working Papers 4308, National Bureau of Economic Research, Inc.
    12. Giuseppe Cavaliere & Luca Fanelli & Attilio Gardini, 2008. "International dynamic risk sharing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 1-16.
    13. Attfield, C. L. F., 1995. "A Bartlett adjustment to the likelihood ratio test for a system of equations," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 207-223.
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    Cited by:

    1. Attilio Gardini & Giuseppe Cavaliere & Luca Fanelli, 2005. "Risk Sharing, avversione al rischio e stabilizzazione delle economie regionali in Italia," Rivista di Politica Economica, SIPI Spa, vol. 95(3), pages 219-266, May-June.

    More about this item

    Keywords

    Consumption risk sharing; Adjustment costs; Forward-looking behavior;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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