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How Does the Sensitivity of Consumption to Income Vary Over Time? International Evidence

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  • Islamaj, Ergys
  • Kose, Ayhan

Abstract

This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.

Suggested Citation

  • Islamaj, Ergys & Kose, Ayhan, 2016. "How Does the Sensitivity of Consumption to Income Vary Over Time? International Evidence," CEPR Discussion Papers 11241, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11241
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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Helena Chulià & Jorge M. Uribe, 2018. "“Together forever? Good and bad market volatility shocks and international consumption risk sharing: A tale of a sign”," IREA Working Papers 201809, University of Barcelona, Research Institute of Applied Economics, revised May 2018.
    3. Islamaj, Ergys & Kose, M. Ayhan, 2016. "How does the sensitivity of consumption to income vary over time? International evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 169-179.
    4. Peter Fuleky & L Ventura & Qianxue Zhao, 2013. "Common correlated effects and international risk sharing," Working Papers 201304, University of Hawaii at Manoa, Department of Economics.
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    6. repec:bla:intfin:v:21:y:2018:i:1:p:55-70 is not listed on IDEAS

    More about this item

    Keywords

    Consumption Sensitivity; Financial Integration; Intertemporal Smoothing; Risk Sharing;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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