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Taxes and International Risk Sharing

  • Epstein, Brendan

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Mukherjee, Rahul

    ()

    (IHEID)

  • Ramnath, Shanthi

    ()

    (U.S. Treasury Department)

We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1110.

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Length: 41 pages
Date of creation: 09 Jun 2014
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Handle: RePEc:fip:fedgif:1110
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