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Incomplete Intertemporal Consumption Smoothing and Incomplete Risksharing

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  • Pierfederico Asdrubali
  • Soyoung Kim

Abstract

This paper develops a method to estimate jointly the degree of (possibly incomplete) intertemporal consumption smoothing and the degree of (possibly incomplete) international/interregional risksharing. This approach generalizes and improves upon studies that either examine only intertemporal consumption smoothing, or analyze risksharing by making an extreme assumption on intertemporal consumption smoothing, or by adopting a purely empirical framework. The method is applied to the US states and OECD and EU countries to analyze how the degrees of risksharing and intertemporal consumption smoothing differ within a country and across countries. The empirical results suggest that: 1) regardless of the assumption on the degree of intertemporal consumption smoothing, the degree of risksharing within a country is larger than across countries 2) the degree of intertemporal consumption smoothing within a country is also larger than across countries, contrary to the findings of past channel studies. Finally, this paper also provides some foundations and suggests limitations of the empirical literature on channels of risksharing and intertemporal consumption smoothing.

Suggested Citation

  • Pierfederico Asdrubali & Soyoung Kim, 2005. "Incomplete Intertemporal Consumption Smoothing and Incomplete Risksharing," International Finance 0506010, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0506010
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    References listed on IDEAS

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    Cited by:

    1. Asdrubali, Pierfederico & Kim, Soyoung, 2009. "Consumption smoothing channels in open economies," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2293-2300, December.
    2. Hevia, Constantino & Servén, Luis, 2018. "Assessing the degree of international consumption risk sharing," Journal of Development Economics, Elsevier, vol. 134(C), pages 176-190.
    3. Kurosaki, Takashi, 2011. "Vulnerability of Household Consumption to Village-level Aggregate Shocks in a Developing Country," PRIMCED Discussion Paper Series 8, Institute of Economic Research, Hitotsubashi University.
    4. Islamaj, Ergys & Kose, M. Ayhan, 2016. "How does the sensitivity of consumption to income vary over time? International evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 169-179.
    5. Peter Fuleky & Luigi Ventura & Qianxue Zhao, 2018. "Common correlated effects and international risk sharing," International Finance, Wiley Blackwell, vol. 21(1), pages 55-70, March.
    6. Alessandro Federici & Pierluigi Montalbano, 2012. "Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis," Working Paper Series 3612, Department of Economics, University of Sussex Business School.
    7. Jeongseok Song & Doojin Ryu, 2018. "Aging effects on consumption risk-sharing channels in European countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(2), pages 585-617.
    8. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    9. Joongsan Ko, 2020. "Intranational Consumption Risk Sharing in South Korea: 2000–2016," Asian Economic Journal, East Asian Economic Association, vol. 34(1), pages 29-49, March.
    10. Hevia, Constantino & Serven, Luis, 2013. "Partial consumption insurance and financial openness across the world," Policy Research Working Paper Series 6479, The World Bank.
    11. Andrea Colciago & Tiziano Ropele & V. Anton Muscatelli & Patrizio Tirelli, 2008. "The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 591-610, August.
    12. Davoine, Thomas & Molnar, Matthias, 2020. "Cross-country fiscal policy spillovers and capital-skill complementarity in integrated capital markets," Economic Modelling, Elsevier, vol. 88(C), pages 132-150.
    13. Digvijay S. Negi & Bharat Ramaswami, 2020. "International risk sharing for food staples," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-002, Indira Gandhi Institute of Development Research, Mumbai, India.
    14. Chun‐Yu Ho & Wai‐Yip Alex Ho, 2015. "Dynamics and Heterogeneity of Inter‐ and Intranational Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 123-142, February.
    15. Christian Friedrich, 2015. "Does Financial Integration Increase Welfare? Evidence from International Household-Level Data," Staff Working Papers 15-4, Bank of Canada.
    16. Anna Lo Prete, 2016. "Labour Market Institutions and Household Consumption Insurance within OECD Countries," The World Economy, Wiley Blackwell, vol. 39(6), pages 755-771, June.
    17. Mr. Tamim Bayoumi & Mr. Alun H. Thomas, 2009. "Today versus Tomorrow - The Sensitivity of the Non-Oil Current Account Balance to Permanent and Current Income," IMF Working Papers 2009/248, International Monetary Fund.

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    More about this item

    Keywords

    Intertemporal consumption smoothing; risksharing; channels of risksharing; international vs. intranational;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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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