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Title: Financial Globalization, International Business Cycles and Consumption Risk Sharing

Author(s): Michael J Artis and Mathias Hoffmann

Publication Date: October 2004

Keyword(s): capital flows, consumption risk sharing, home bias and international and regional business cycles

Programme Area(s): International Macroeconomics

Abstract: Consumption based measures of international risk sharing seem to defy the effects of more than two decades of ongoing financial globalization. We put forward an explanation of this puzzle: under incomplete risk sharing and if there are several sources of risk, consumption based measures of risk sharing will also be a function of the structure of business cycles, i.e. their degree of synchronization and persistence. We argue that permanent and transitory shocks to output constitute such qualitatively different sources of risk. Using OECD data, we then illustrate that countries have indeed become more insured against permanent shocks, in line with the ever better integration of financial markets. Basic measures of risk sharing have however not picked up this change because globalization has also affected the structure of business cycles. In particular, our results are consistent with the observation recently made by several authors that the globalization period has seen the emergence of less volatile and internationally more synchronized business cycles among industrialized countries.

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Bibliographic Reference

Artis, M and Hoffmann, M. 2004. 'Financial Globalization, International Business Cycles and Consumption Risk Sharing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4697