Who Smooths the Shock ? Government and Private Saving in International Risk Sharing

This paper examines the channels through which countries smooth income volatility, emphasizing the distinct roles of public and private saving across levels of development and macroeconomic characteristics. Using a panel of 134 countries over 1990–2023 and an accounting-based decomposition of risk sharing, the paper documents three core findings. First, savings are a central smoothing mechanism but operate very differently across country groups. In advanced economies, government saving absorbs about 14 percent of output shocks—exceeding the contribution of private saving. In emerging markets and developing economies, however, private saving dominates, smoothing roughly 16 percent of shocks compared with only 6 percent through government saving. Second, primary investment income from abroad has helped smooth income volatility only in advanced economies, while remittances and transfers have helped smooth income volatility in emerging markets and developing economies. Third, fiscal space and capital account openness shift the balance between public and private stabilization. Countries that have more fiscal space and open capital accounts are better able to smooth output volatility through government savings.