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International risk-taking, volatility, and consumption growth

  • Maria Giduskova
  • Borja Larrain

We show that countries that take on more international risk are rewarded with higher expected consumption growth. International risk is defined as the beta of a country's consumption growth with world consumption growth. High-beta countries hold more foreign assets, as predicted by the theory. Despite the positive effects of beta, a country's idiosyncratic volatility is negatively correlated with expected consumption growth. Therefore, uninsured shocks affect not only current growth, but also future consumption growth. High-volatility countries have worse net foreign asset positions, suggesting that solvency constraints limit their future growth.

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Article provided by Federal Reserve Bank of Boston in its journal Communities and Banking.

Volume (Year): (2006)
Issue (Month): ()

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Handle: RePEc:fip:fedbcb:y:2006:n:06-17
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