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Income and consumption smoothing and welfare gains across Pacific Island Countries: The role of remittances and foreign aid

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  • Balli, Faruk
  • Balli, Hatice O.

Abstract

We examine the potential welfare gains and channels of income smoothing for Pacific Island Countries (PICs) and find that, under full risk sharing overall welfare gains across all PICs (particularly, Kiribati, Palau, and Papua New Guinea) are at desirable levels. However, for Australia, the potential welfare gain from risk sharing is almost similar to the gain it obtains if Australia attains full risk sharing with the rest of the OECD countries or with New Zealand alone. We also break down output using the framework of Sørensen and Yosha (1998) to quantify the extent and channels of risk sharing across PICs. For PICs, income-smoothing channels (net factor income and current transfers) play a significant role in buffering the output shock compared to the performance of those channels on smoothing the output shock for OECD countries. Domestic savings also smooth a fair portion of shocks to output, but the extent is much lower compared to that of OECD countries. Further, we analyze the effect of remittances and foreign aid on income smoothing for the PICs excluding Australia and New Zealand. Income smoothing via remittances is highly volatile and significant in recent years, while foreign aid seems to be a stronger and more stable channel for smoothing domestic output shocks for PICs.

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  • Balli, Faruk & Balli, Hatice O., 2011. "Income and consumption smoothing and welfare gains across Pacific Island Countries: The role of remittances and foreign aid," Economic Modelling, Elsevier, vol. 28(4), pages 1642-1649, July.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1642-1649
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    Cited by:

    1. Xavier Debrun & Paul R. Masson, 2013. "Modelling Monetary Union in Southern Africa: Welfare Evaluation for the CMA and SADC," South African Journal of Economics, Economic Society of South Africa, vol. 81(2), pages 275-291, June.
    2. Supriyo De & Ergys Islamaj & M. Ayhan Kose & S. Reza Yousefi, 2016. "Remittances over the business cycle: theory and evidence," CAMA Working Papers 2016-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Balli, F. & Pericoli, F.M. & Pierucci, E., 2014. "Foreign portfolio diversification and risk-sharing," Economics Letters, Elsevier, vol. 125(2), pages 187-190.
    4. Jounghyeon Kim, 2013. "Remittances and Currency Crisis: The Case of Developing and Emerging Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(6), pages 88-111, November.
    5. Faruk Balli & F.M. Pericoli & E. Pierucci, 2015. "Channels of risk-sharing at a micro level: savings, investments and the risk aversion heterogeneity," CAMA Working Papers 2015-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Faruk Balli & Faisal Rana, 2014. "Determinants of risk sharing through remittances: cross-country evidence," CAMA Working Papers 2014-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Balli, Faruk & Rana, Faisal, 2015. "Determinants of risk sharing through remittances," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 107-116.
    8. Christian E. Weller & Ghazal Zulfiqar, 2013. "Financial Market Diversity and Macroeconomic Stability," Working Papers wp332, Political Economy Research Institute, University of Massachusetts at Amherst.
    9. Faruk Balli & Eleonora Pierucci, 2015. "Globalization and international risk-sharing: do political and social factors matter more than economic integration?," CAMA Working Papers 2015-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    10. Masayoshi Hayashi, 2013. "On the Decomposition of Regional Stabilization and Redistribution," CIRJE F-Series CIRJE-F-910, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    Keywords

    Foreign aid Remittance inflows International integration Income smoothing Consumption smoothing Pacific Island Countries Welfare gains from risk sharing;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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