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Domestic and International Finance: How Do They Affect Consumption Smoothing?

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  • Huizinga, Harry
  • Zhu, Dantao

Abstract

This Paper uses empirical proxies for the domestic development and international integration of debt and equity markets to assess the role of financial development in international consumption smoothing. First, we find that both domestic and international finance contribute to international consumption smoothing. Second, domestic debt market development is relatively important in explaining consumption smoothing relative to GNP among developed countries, while international debt market integration appears to be the limiting factor in developing countries. Third, both debt and equity market development contribute to the smoothing of consumption relative to GDP, with a somewhat larger role for the former than the latter. Finally, debt and equity market development reveal themselves to be substitutes in that more of one reduces the contribution of the other to consumption smoothing.

Suggested Citation

  • Huizinga, Harry & Zhu, Dantao, 2004. "Domestic and International Finance: How Do They Affect Consumption Smoothing?," CEPR Discussion Papers 4677, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4677
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christev, Atanas & Melitz, Jacques, 2010. "EMU, EU, capital market integration and consumption smoothing," CEPR Discussion Papers 7776, C.E.P.R. Discussion Papers.
    2. Atanas Christev & Jacques Melitz, 2013. "EMU, EU, Market Integration and Consumption Smoothing," Open Economies Review, Springer, pages 789-818.
    3. Rose, Andrew K. & Spiegel, Mark M., 2009. "International financial remoteness and macroeconomic volatility," Journal of Development Economics, Elsevier, vol. 89(2), pages 250-257, July.
    4. Aidan Corcoran, 2008. "International Financial Integration and Consumption Risk Sharing," The Institute for International Integration Studies Discussion Paper Series iiisdp241, IIIS.

    More about this item

    Keywords

    consumption smoothing; financial development;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F30 - International Economics - - International Finance - - - General

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