International dynamic risk sharing

Giuseppe Cavaliere (), Luca Fanelli () and Attilio Gardini
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Attilio Gardini: Department of Statistical Sciences, University of Bologna, Bologna, Italy, Postal: Department of Statistical Sciences, University of Bologna, Bologna, Italy

Journal of Applied Econometrics, 2008, vol. 23, issue 1, pages 1-16

Abstract: In this paper we examine the implications of international risk sharing among a set of countries in the presence of market frictions which complicate the instantaneous adjustment to the first-order conditions. We suggest approximating the consumption streams of countries belonging to the risk sharing coalition in terms of a disequilibrium dynamic model embodying forward-looking adjustment. Econometric methods for estimating and testing the model are discussed. Empirical analysis of a set of core European countries suggests that once preference parameters are allowed to vary across countries, we are able to identify a group of nations that share risks against idiosyncratic permanent income shocks. The equilibrium position, however, is reached after a long adjustment period. Copyright © 2008 John Wiley & Sons, Ltd.

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Related works:
Working Paper: International dynamic risk sharing (2006)
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