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Spatial consumption risk sharing

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  • Arora, Prateek
  • Choo, Dongwan
  • Hu, Chenyue

Abstract

This paper investigates how bilateral economic linkages influence consumption synchronization across economies in response to idiosyncratic shocks. Using the US state-level data, we find the degree of bilateral consumption smoothing to decrease with geographic distance. To explain this fact, we develop an open economy DSGE model that incorporates trade, migration, and finance as channels of risk sharing subject to bilateral frictions that potentially covary with distance. Calibrated to the US data, this structural model enables us to examine interactions of different channels in general equilibrium and quantify their impacts on states’ consumption. Through counterfactual exercises, we find that turning off the three channels weakens consumption correlations across states in general, while trade is more effective than migration and financial channels in stabilizing consumption fluctuations.

Suggested Citation

  • Arora, Prateek & Choo, Dongwan & Hu, Chenyue, 2025. "Spatial consumption risk sharing," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002132
    DOI: 10.1016/j.euroecorev.2025.105163
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    Keywords

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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