Financial integration and consumption risk sharing and smoothing

Which market integration measure?

“…An increasing degree of financial integration across countries and regions provides both advantages and disadvantages. On the one side, a relatively high level of integration (i.e., complete international financial markets) increases risk-sharing opportunities by allowing for larger insurance benefits and more efficient consumption smoothing (see, among others, Jappelli and Pistaferri, 2011;Suzuki, 2014). In this respect, financial integration may generate both short-and long-run welfare benefits (Colacito and Croce, 2010;Yu, 2015).…”

Financial-integration thresholds for consumption risk-sharing

“…In this paper, the author decomposes the GDP into permanent and transitory components and specifies respective processes of each component using a state-space/unobserved component model to derive permanent slope and level-based income shocks and transitory shocks. Furthermore, controlling for such a stochastic nature of income paths Suzuki (2014) reveal that rational expectations (RE) and the permanent income hypothesis (PIH) for transitory income are not rejected for OECD countries, and the predictions of RE/PIH of large increases in consumption in response to positive income growth shocks also hold in the data. 5 For a summary of predictions, methodologies, and results on consumption risk-sharing in industrialized and emerging economies, see, for example, Kose & Prasad (2010) or Islamaj (2008).…”

“…Studies have further investigated this puzzling nonresponsiveness of consumption risk-sharing in emerging and developing economies during the financial integration process (see, e.g., Suzuki, 2014;Kose & Prasad, 2010). In particular, Suzuki (2014) points toward the differences in income processes as the underlying factor for the varying degree of consumption risk-sharing and smoothing among economies as a result of financial integration.…”

“…In particular, Suzuki (2014) points toward the differences in income processes as the underlying factor for the varying degree of consumption risk-sharing and smoothing among economies as a result of financial integration. 4 Kose & Prasad (2010), on the other hand, use the composition of financial assets and liabilities to study consumption risk-sharing patterns.…”

“…Per-capita real GDP and per-capita real (public plus private) consumption are taken from the World Bank's Development Indicators. Stocks of financial assets and liabilities (debt, foreign direct investments (FDI), and foreign portfolio investment (FPI)) are taken from the extended "External Wealth of Nations" data set by In particular, Suzuki (2014) tests the joint hypothesis of rational expectations and permanent income hypothesis. In this paper, the author decomposes the GDP into permanent and transitory components and specifies respective processes of each component using a state-space/unobserved component model to derive permanent slope and level-based income shocks and transitory shocks.…”