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Spatial consumption risk sharing

Author

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  • Arora, Prateek
  • Choo, Dongwan
  • Hu, Chenyue

Abstract

This paper investigates how bilateral economic linkages influence consumption synchronization across economies in response to idiosyncratic shocks. Using the US state-level data, we find the degree of bilateral consumption smoothing to decrease with geographic distance. To explain this fact, we develop an open economy DSGE model that incorporates trade, migration, and finance as channels of risk sharing subject to bilateral frictions that potentially covary with distance. Calibrated to the US data, this structural model enables us to examine interactions of different channels in general equilibrium and quantify their impacts on states’ consumption. Through counterfactual exercises, we find that turning off the three channels weakens consumption correlations across states in general, while trade is more effective than migration and financial channels in stabilizing consumption fluctuations.
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Suggested Citation

  • Arora, Prateek & Choo, Dongwan & Hu, Chenyue, 2025. "Spatial consumption risk sharing," Santa Cruz Department of Economics, Working Paper Series qt6n3095x8, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt6n3095x8
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    Cited by:

    1. Sanyal, Anirban, 2025. "Caught in the crossfire: How trade policy uncertainty impacts global trade," International Economics, Elsevier, vol. 184(C).

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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