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Risk sharing opportunities and macroeconomic factors in Latin American and Caribbean countries : A consumption insurance assessment

  • Ventura, Luigi

This paper evaluates the degree of consumption insurance enjoyed by Latin American and Caribbean countries, with respect to various reference areas, by estimating a parameter expressing the sensitivity of a country's consumption growth to a measure of idiosyncratic shocks to income. The paper surveys common econometric implementations of"consumption insurance tests."The author proposes some econometric procedures in order to detect the actual presence of international risk sharing, as well as to assess the relative impact of idiosyncratic versus aggregate shocks. The evidence suggests that Latin American and Caribbean economies have been hit by non-diversifiable income shocks, that idiosyncratic risk is relatively more important than aggregate risk, and that some countries in the region appear to enjoy a certain amount of international risk diversification. The paper also identifies some macroeconomic factors that may be responsible for a higher or lower degree of risk pooling (such as international openness, financial depth, and credit availability). The findings show that the financial development of an economy is a crucial factor in determining the amount of risk sharing opportunities, as well as public expenditure. The preliminary results also suggest that trade openness and shocks to terms of trade play an important role in determining the degree of insurability of such risks.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4490.

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Date of creation: 01 Jan 2008
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Handle: RePEc:wbk:wbrwps:4490
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  1. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  3. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
  4. Artis, Michael J & Hoffmann, Mathias, 2004. "Financial Globalization, International Business Cycles and Consumption Risk Sharing," CEPR Discussion Papers 4697, C.E.P.R. Discussion Papers.
  5. Kose, M. Ayhan & Prasad, Eswar & Terrones, Marco E., 2007. "How Does Financial Globalization Affect Risk Sharing? Patterns and Channels," IZA Discussion Papers 2903, Institute for the Study of Labor (IZA).
  6. Eric van Wincoop, 1998. "How big are potential welfare gains from international risksharing?," Staff Reports 37, Federal Reserve Bank of New York.
  7. Luigi Ventura, 2007. "A note on the relevance of prudence in precautionary saving," Economics Bulletin, AccessEcon, vol. 4(23), pages 1-11.
  8. Morduch, J., 1995. "Income Smoothing and Consumption Smoothing," Papers 512, Harvard - Institute for International Development.
  9. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  10. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  11. Sorensen, Bent E. & Wu, Yi-Tsung & Yosha, Oved & Zhu, Yu, 2007. "Home bias and international risk sharing: Twin puzzles separated at birth," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 587-605, June.
  12. Benoît Mercereau, 2006. "Financial Integration in Asia; Estimating the Risk-Sharing Gains for Australia and Other Nations," IMF Working Papers 06/267, International Monetary Fund.
  13. Mario J Crucini & Gregory D Hess, 1999. "International and Intranational Risk Sharing," CESifo Working Paper Series 227, CESifo Group Munich.
  14. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  15. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  16. Lewis, Karen K., 2000. "Why do stocks and consumption imply such different gains from international risk sharing?," Journal of International Economics, Elsevier, vol. 52(1), pages 1-35, October.
  17. Imbs, Jean, 2004. "The Real Effects of Financial Integration," CEPR Discussion Papers 4335, C.E.P.R. Discussion Papers.
  18. repec:ebl:ecbull:v:4:y:2007:i:23:p:1-11 is not listed on IDEAS
  19. Michael B. Devereux & Gregor W. Smith, 1991. "International Risk Sharing and Economic Growth," Working Papers 829, Queen's University, Department of Economics.
  20. Sorensen, Bent E. & Yosha, Oved, 1998. "International risk sharing and European monetary unification," Journal of International Economics, Elsevier, vol. 45(2), pages 211-238, August.
  21. Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank.
  22. Auffret, Philippe, 2001. "An alternative unifying measure of welfare gains from risk-sharing," Policy Research Working Paper Series 2676, The World Bank.
  23. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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