Correct assessment of consumption risk and its international diversification has important policy implications. However, existing studies of international risk sharing rely on the unrealistic assumptions that all economies are characterized by symmetric preferences and uniform transmission of global shocks. We relax these homogeneity constraints and compare our proposed approach with the conventional ones using a 44‐year panel of 120 countries. Our results confirm that consumption is only partially smoothed internationally and risk sharing is directly related to the level of development, but we do not detect a significant increase in risk sharing during the surge in financial globalization over the last four decades.

Universit y of Hawai ' i at Manoa 2424 Maile way, rooM 40 • HonolUlU, Hawai ' i 9 6822 w w w.UHero. Hawaii. edU working papers are preliMinary Materials circUl ated to stiMUl ate discUssion and critical coMMent. tHe views expressed are tHose of tHe individUal aUtHors .

Empirical tests of international risk sharing usually focus on the short run and impose homogeneity across countries. We extend the existing literature by analysing both the short run and the long run aspects of risk sharing and by using novel econometric tools that properly account for heterogeneity across a large set of countries. The results confirm that international risk sharing is only partial and quite variable across economies. However, there appears to be no trade‐off between the short run and long run: countries better insured in the long run also tend to perform better in the short run, with the strength of domestic credit markets being crucial in shaping this relationship. Copyright © 2015 John Wiley & Sons, Ltd.