Common correlated effects and international risk sharing

Abstract

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.

International Risk Sharing in the Short and in the long run under Country Heterogeneity

“…In particular, they robustify the estimation against heterogeneous preferences and variation in the extent of global shocks transmitted to individual countries. Further merits of this methodology relative to the conventional one are discussed in depth by Fuleky et al ().…”

Risk Sharing in Europe: New Empirical Evidence on the Capital Markets Channel

“…As shown by Fuleky et al (2018) the standard models appear too restrictive and sources of heterogeneity need to be further investigated. Firstly, the smoothing channels can vary widely across countries and this affects the magnitude of the impact of income shocks on consumption.…”

Risk sharing in Europe: new empirical evidence on the capital markets channel

“…We examine four alternative models (all variables are in log) following Fuleky et al (2018) in order to introduce various sources of heterogeneity. We start with the most constrained model and then relax the constraints one by one.…”