Dynamic risksharing in the United States and Europe

Abstract

This paper uses a panel VAR model to improve upon the existing literature on interregional risk sharing channels (e.g. Asdrubali, Sorensen and Yosha, 1996) in several respects. First, it endogenizes the output process within a multi-equation framework, capturing the dynamic feedback between output and various risk sharing channels. Second, in contrast to previous research's analysis of static risk sharing in the presence of exogenous output shocks, it uses impulse response functions to trace the role of each risk sharing channel over time, in the presence of different structural shocks (temporary vs. persistent and output vs. risk sharing channels). Third, the paper extends the risk sharing channels typically analyzed, by considering the consumption smoothing role of changes in the nominal exchange rate and relative commodity prices across regions. As a result, it is able to better address such policy issues as whether public risk sharing has been a substitute or a complement for financial market diversification activities, or whether the risk sharing role of exchange rate movements in Europe has been relatively unimportant.

Interstate risk sharing in Germany: 1970-2006

“…Contrary to most other studies, Hess and Shin (1998) find that the quantity anomaly is present at the national level in the US as well. 4 Asdrubali and Kim (2004) find similar results for US states; however, when they look at OECD countries and at the EU15, the results are markedly different: Capital markets and international transfers play almost no role, only credit markets do and they contribute about 22 percent to consumption smoothing. 5 As pointed out by Sorensen and Yosha (2000), Bayoumi and Klein's estimation does not distinguish between the three separate smoothing channels.…”

International dynamic risk sharing

“…Germany, France, Italy, Spain, Netherlands, Belgium, Portugal and Austria; we also included the U.K. as the most important 'non-EMU joining' country of the European Union (EU). As is standard in the risk sharing literature Yosha, 1998, Asbrubali andKim, 2004) we use annual data over a relatively long period from 1963 to 2003 and consider Germany as the 'leader' country. Data are collected from several international sources.…”

“…Conventional risk sharing tests and/or techniques aimed to measure the different channels of consumption insurance are based on this requirement, see e.g. Asdrubali et al (1996), Asdrubali and Kim (2004) and references therein. However, several empirical tests have shown substantial departures from this proposition, the so-called 'full risk sharing hypothesis' (FRS), both on individual and aggregated data, Lewis (1999).…”

Consumption smoothing channels in open economies

“…Alternatively, as shown in Asdrubali and Kim (2004), a natural implementation of consumption smoothing measures after a shock triggering nontrivial dynamics is represented by impulse response functions of a recursive VAR, featuring all the relevant variables. In this section, we lay out the econometric model of such a VAR, pointing out its advantages with respect to static systems such as SURs.…”

“…This paper aims to set up an framework that unifies the analysis of different strands of the empirical open economy literature from the viewpoint of consumption smoothing channels. Following the empirical literature on consumption smoothing channels (Sørensen and Yosha 1998, Asdrubali and Kim 2004), on the intertemporal approach to the current account (Glick andRogoff 1995, Ghosh 1995), and on the international real business cycle (Baxter 1995, Baxter and Crucini 1993, we impose identifying restrictions on national accounts identities, and analyze smoothing channels jointly through a VAR's impulse responses. We show that the identifying restrictions and the variables in the empirical model are consistent with the natural implications of intertemporal open economy models (e.g., Rogoff 1996, Baxter andCrucini 1995).…”