International risk‐sharing in the short run and in the long run
Abstract:Abstract International risk‐sharing has far‐reaching implications both for economic policy and for basic research in economics. When countries do not share consumption risk, individuals experience consumption fluctuations that are undesirable and possibly unnecessary. We investigate bilateral risk‐sharing at short vs. long horizons. We find substantial cross‐country consumption correlations at trend and business‐cycle frequencies. Correlations are particularly high within Europe. Prior research focused on first‐difference correlations, which are typically quite low. We argue that this reflects measurement error. At all horizons, we find that consumption correlations are not significantly different from output correlations, implying a lack of deliberate consumption risk‐sharing.
Document Type: Research Article
Affiliations: Department of Economics, Boston University
Publication date: 2012-05-01