The Home Bias, Capital Income Flows and Improved Long‐Term Consumption Risk Sharing between Industrialized Countries

Is financial globalization associated with improved international consumption risk sharing? We focus on the long-term (i.e. low frequency) comovement of consumption and output in answering this question. Theoretically, the impact of financial globalization should show up first and most robustly in the lower frequencies of the data. We show that this is the case empirically: by the end of our sample period (1960-2007) up to 40 percent of long-term idiosyncratic consumption risk get shared between industrialized countries – as compared to less than 10 percent before 1990. This dramatic increase is associated with a huge increase in international capital income flows: while capital income flows remain relatively limited as a channel of risk sharing at business cycle horizons, their contribution to international risk sharing at longer horizons has increased substantially. Much of this increase can be attributed to the growth in international asset positions over the recent globalization period.

[1]  Mario J. Crucini.  On International and National Dimensions of Risk Sharing , 1999, Review of Economics and Statistics.

[2]  Patrick J. Kehoe,et al.  International Real Business Cycles , 1992, Journal of Political Economy.

[3]  John H. Cochrane,et al.  A Simple Test of Consumption Insurance , 1991, Journal of Political Economy.

[4]  Ravi Bansal,et al.  Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles , 2000 .

[5]  Mathias Hoffmann,et al.  Consumption Risk Sharing over the Business Cycle: The Role of Small Firms' Access to Credit Markets , 2009, Review of Economics and Statistics.

[6]  Christian Julliard,et al.  Consumption Risk and the Cross Section of Expected Returns , 2004, Journal of Political Economy.

[7]  B. Efron.  The jackknife, the bootstrap, and other resampling plans , 1987 .

[8]  J. Imbs.  The Real Effects of Financial Integration , 2006 .

[9]  P. Lane,et al.  The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004 , 2006, SSRN Electronic Journal.

[10]  Thomas Nitschka.  Banking sectors' international interconnectedness: Implications for consumption risk sharing in Europe , 2011 .

[11]  Marcel Fratzscher,et al.  Risk Sharing, Finance and Institutions in International Portfolios , 2007 .

[12]  Robert E. Lucas,et al.  Models of business cycles , 1987 .

[13]  Barbara J Mace.  Full Insurance in the Presence of Aggregate Uncertainty , 1991, Journal of Political Economy.

[14]  M. Artis,et al.  Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration , 2007 .

[15]  Sascha O. Becker,et al.  Intra- and International Risk-Sharing in the Short Run and the Long Run , 2003, SSRN Electronic Journal.

[16]  Bent E. Sørensen,et al.  Channels of Interstate Risk Sharing: United States 1963–1990 , 1996 .

[17]  Johann Scharler,et al.  Reconsidering Consumption Risk Sharing among OECD Countries: Some Evidence Based on Panel Cointegration , 2008 .

[18]  Bent E. Sørensen,et al.  Risk Sharing and Industrial Specialization: Regional and International Evidence , 2000 .

[19]  P. Lane,et al.  International Financial Integration , 2003, SSRN Electronic Journal.

[20]  Donggyu Sul,et al.  Cointegration Vector Estimation by Panel Dols and Long-Run Money Demand , 2002 .

[21]  Jing Zhang,et al.  Financial Integration and International Risk Sharing , 2006 .

[22]  M. Artis,et al.  The Home Bias and Capital Income Flows Between Countries and Regions , 2006 .

[23]  P. Pedroni.  PANEL COINTEGRATION: ASYMPTOTIC AND FINITE SAMPLE PROPERTIES OF POOLED TIME SERIES TESTS WITH AN APPLICATION TO THE PPP HYPOTHESIS , 2004, Econometric Theory.

[24]  C. Buch.  From the Stability Pact to ESM - What next? , 2012 .

[25]  J. Heathcote,et al.  Consumption and labor supply with partial insurance: An analytical framework , 2014 .

[26]  Bent E. Sørensen,et al.  International Risk Sharing and European Monetary Unification , 1998 .

[27]  Bent E. Sørensen,et al.  Home Bias and International Risk Sharing: Twin Puzzles Separated at Birth , 2005 .

[28]  Maurico Obstfeld.  External adjustment , 2004 .

[29]  P. Lane.  Do international investment income flows smooth income? , 2001 .

[30]  Robert P. Flood,et al.  International Risk Sharing During the Globalization Era , 2009, SSRN Electronic Journal.

[31]  Mario J. Crucini,et al.  Business Cycles and the Asset Structure of Foreign Trade , 1994 .

[32]  E. Prasad,et al.  Does financial globalization promote risk sharing , 2009 .

[33]  P. Phillips,et al.  Linear Regression Limit Theory for Nonstationary Panel Data , 1999 .

[34]  B. Efron,et al.  The Jackknife: The Bootstrap and Other Resampling Plans. , 1983 .

[35]  S. Eijffinger,et al.  Incentive problems and the pattern of international risk sharing , 2010 .

[36]  Eric van Wincoop,et al.  Growth Uncertainty and Risksharing , 1997 .

[37]  M. Artis,et al.  Financial Globalization, International Business Cycles and Consumption Risk Sharing , 2004 .