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The Evolution of International Consumption Risk Sharing Over Time And Frequency

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Abstract

Improved consumption risk sharing is one of the fundamental predicted benefits of increased financial integration, yet the empirical evidence concerning this proposition is mixed. Using the novel empirical technique of wavelet analysis, this paper for the first time in the literature uncovers the heterogeneous evolution of consumption and output correlations over the time and frequency dimensions simultaneously. Periods of strong comovement in consumption growth rates not only occur during times of common (uninsurable) shocks to output, but also to some extent during times of increased financial integration. This evidence adds a new dimension to the consumption output correlation puzzle, which appears to only hold at certain time periods and frequencies.

Suggested Citation

  • Cameron McLoughlin, 2010. "The Evolution of International Consumption Risk Sharing Over Time And Frequency," IHEID Working Papers 21-2010, Economics Section, The Graduate Institute of International Studies, revised 25 Nov 2010.
  • Handle: RePEc:gii:giihei:heidwp21-2010
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    Keywords

    consumption - Output Correlation Puzzle; International Consumption Risk Sharing; Wavelet Analysis;

    JEL classification:

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

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