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Testing Full Consumption Insurance in the Frequency Domain

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  • Santos Monteiro, Paulo

    (University of Warwick)

Abstract

Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.

Suggested Citation

  • Santos Monteiro, Paulo, 2008. "Testing Full Consumption Insurance in the Frequency Domain," The Warwick Economics Research Paper Series (TWERPS) 874, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:874
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_874.pdf
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    References listed on IDEAS

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    Cited by:

    1. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," Discussion Papers of DIW Berlin 1362, DIW Berlin, German Institute for Economic Research.
    2. Robert Kollmann, 2012. "Limited asset market participation and the consumption‐real exchange rate anomaly," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 566-584, May.
    3. Donadelli, Michael & Paradiso, Antonio, 2014. "Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 206-220.
    4. Caporale, Guglielmo Maria & Donadelli, Michael & Varani, Alessia, 2015. "International capital markets structure, preferences and puzzles: A “US–China World”," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 85-99.
    5. Kollmann, Robert, 2009. "Domestic Financial Frictions: Implications for International Risk Sharing, Real Exchange Rate Volatility and International Business Cycles," MPRA Paper 70348, University Library of Munich, Germany.

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    More about this item

    Keywords

    Consumption insurance ; Idiosyncratic risk ; Frequency domain;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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