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On the empirics of international smoothing

  • Asdrubali, Pierfederico
  • Kim, Soyoung

By fully exploiting the statistical properties of panel data, this paper improves upon existing methodologies to estimate consumption smoothing at least in three respects. First, we model explicitly incomplete risksharing as well as incomplete intertemporal smoothing, and couch the two mechanisms in a unified framework. Second, we fully exploit simple panel data analysis in order to measure degrees of both risksharing and intertemporal smoothing taking place in a given set of economic regions. In particular, we are able to measure not only the smoothing of idiosyncratic shocks, but also the dependence on aggregate (non-diversifiable) shocks. Third, we distinguish neatly between the effects of temporary vs. permanent shocks. This can be done by taking advantage of the complementarity between the "within" estimator and the "between" estimator in a panel regression. We apply the above methodology to a panel of 23 OECD countries in the period from 1955 to 2005. The main finding is consistent with the puzzle of negligible international risksharing, as domestic consumption growth - once properly analyzed - does not depend on aggregate income growth. Our analysis shows that industrial countries have tended to absorb output shocks mostly through intertemporal smoothing. About 25% of all temporary shocks are smoothed this way, while a comparable fraction of permanent shocks determine consumption growth.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 374-381

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:3:p:374-381
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Pakko, Michael R, 1997. "International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 386-400, August.
  2. Bean, Charles R, 1985. "The Estimation of 'Surprise' Models and the 'Surprise' Consumption Function," CEPR Discussion Papers 54, C.E.P.R. Discussion Papers.
  3. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  4. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  5. Canova, Fabio & Ravn, Morten O, 1994. "International Consumption Risk Sharing," CEPR Discussion Papers 1074, C.E.P.R. Discussion Papers.
  6. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
  7. Maurice Obstfeld, 1994. "Are Industrial-Country Consumption Risks Globally Diversified?," NBER Working Papers 4308, National Bureau of Economic Research, Inc.
  8. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  9. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  10. Lewis, Karen K, 1996. "What Can Explain the Apparent Lack of International Consumption Risk Sharing?," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 267-97, April.
  11. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
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  13. Bent E. S�rensen & Oved Yosha, 1998. "International Risk Sharing and European Monetary Unification," Temi di discussione (Economic working papers) 327, Bank of Italy, Economic Research and International Relations Area.
  14. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  15. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  16. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
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  18. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  19. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
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  21. Bent E. Sorensen & Oved Yosha, 2000. "Is risk sharing in the United States a regional phenomenon?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 33-47.
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