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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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