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International dynamic risk sharing

  • Giuseppe Cavaliere

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

  • Luca Fanelli

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

  • Attilio Gardini

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

In this paper we examine the implications of international risk sharing among a set of countries in the presence of market frictions which complicate the instantaneous adjustment to the first-order conditions. We suggest approximating the consumption streams of countries belonging to the risk sharing coalition in terms of a disequilibrium dynamic model embodying forward-looking adjustment. Econometric methods for estimating and testing the model are discussed. Empirical analysis of a set of core European countries suggests that once preference parameters are allowed to vary across countries, we are able to identify a group of nations that share risks against idiosyncratic permanent income shocks. The equilibrium position, however, is reached after a long adjustment period. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 1-16

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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:1-16
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  1. Canova, Fabio & Ravn, Morten O, 1996. "International Consumption Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 573-601, August.
  2. Pierfederico Asdrubali & Soyoung Kim, 2000. "Dynamic Risk Sharing in the United States and Europe," Econometric Society World Congress 2000 Contributed Papers 1621, Econometric Society.
  3. Maurice Obstfeld., 1993. "Are Industrial-Country Consumption Risks Globally Diversified?," Center for International and Development Economics Research (CIDER) Working Papers C93-014, University of California at Berkeley.
  4. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
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  6. Gianluca Benigno & Christoph Theonissen, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEP Discussion Papers dp0771, Centre for Economic Performance, LSE.
  7. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Trends and cycles in the euro area: how much heterogeneity and should we worry about it?," Working Paper Series 0595, European Central Bank.
  8. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
  9. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
  10. Cavaliere, Giuseppe & Fanelli, Luca & Gardini, Attilio, 2006. "Regional consumption dynamics and risk sharing in Italy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 525-542.
  11. Jeffrey C. Fuhrer & Michael W. Klein, 1998. "Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations," NBER Working Papers 6735, National Bureau of Economic Research, Inc.
  12. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
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  14. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
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  16. Mazzenga, Elisabetta & Ravn, Morten O, 2002. "International Business Cycles: The Quantitative Role of Transportation Costs," CEPR Discussion Papers 3530, C.E.P.R. Discussion Papers.
  17. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche 9232, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  18. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
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  22. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, 03.
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