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What Can Explain the Apparent Lack of International Consumption Risk Sharing?

  • Karen K. Lewis
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    Recent research in international business cycles based upon complete markets has found that international consumption correlations are lower than predicted by the standard risk-sharing implications of these models. In this paper, I use regression tests to ask whether two different types of explanations can help explain this result. First, I consider whether non-separabilities between tradeables and non-tradeable leisure or goods can explain the puzzle. Surprisingly, non-separabilities explain only a tiny fraction of the variation in tradeables consumption across countries. Furthermore, risk-sharing in tradeables is rejected. Second, I examine the effects of capital market restrictions on aggregate consumption risk-sharing by countries. While rejections of risk-sharing are stronger for countries facing more severe capital market restrictions, risk-sharing is still rejected for the unrestricted group of countries. Therefore, risk-sharing does not appear to be resolved by either explanation alone. However, when I allow for both non-separabilities and certain market restrictions, risk-sharing among unrestricted countries is not rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk-sharing across countries.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5203.

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    Date of creation: Aug 1995
    Date of revision:
    Publication status: published as Journal of Political Economy, April 1996, vol.104, pp.267-297.
    Handle: RePEc:nbr:nberwo:5203
    Note: IFM AP
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