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Consumption risk-sharing across G-7 countries

  • Giovanni P. Olivei

An intensely debated issue in international economics concerns the extent to which investors exploit the benefits from international trade in financial assets. Such benefits have long been acknowledged in theory but, despite the continuing process of financial integration and globalization, it is unclear whether they are fully exploited in actual practice. ; This article reexamines some of the evidence concerning the degree to which international financial markets help countries diversify away country-specific risks to achieve a mutually preferable allocation of consumption. By looking at national consumption correlations across G-7 countries, the author investigates whether greater incentives to diversify risks internationally have been accompanied by an effective increase in consumption risk-sharing. He finds that the apparent lack of consumption risk-sharing found in prior studies continued to persist in the 1990s and that the puzzle of low international consumption correlations is probably worse than usually thought. The author then considers alternative explanations for the puzzle and proposals to achieve a better degree of international risk-sharing.

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Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2000)
Issue (Month): Mar ()
Pages: 3-14

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Handle: RePEc:fip:fedbne:y:2000:i:mar:p:3-14
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  1. Richard Portes & Helene Rey, 2000. "The determinants of cross-border equity flows," LSE Research Online Documents on Economics 20203, London School of Economics and Political Science, LSE Library.
  2. Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
  3. Eric van Wincoop, 1998. "How big are potential welfare gains from international risksharing?," Staff Reports 37, Federal Reserve Bank of New York.
  4. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
  5. Michael R. Pakko, 1998. "Characterizing Cross-Country Consumption Correlations," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 169-174, February.
  6. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  7. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
  8. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
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