DP1074 International Consumption Risk Sharing

Author(s): Fabio Canova, Morten O Ravn
Publication Date: December 1994
Keyword(s): Capital Mobility, Consumption Insurance, International Investments, Long Run Convergence
JEL(s): D81, E32, F21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1074

This paper examines whether or not consumption risk sharing occurs in a panel of industrialized countries. We derive the international consumption insurance proposition in a simple theoretical model and show how it should be modified in more complicated models. We analyse empirically the implications of the proposition for pairs of countries over cycles of different length, and find that aggregate domestic consumption is completely insured against idiosyncratic real, demographic, fiscal and monetary shocks, but that it co-varies with domestic variables over long or infinite cycles. Also, the cross equation restrictions imposed by the theory are, in general, rejected. The policy implications of the results are discussed.