Declining Home Bias and the Increase in International Risk Sharing: Lessons from European Integration

Michael John Artis () and Mathias Hoffmann ()

No 6617, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides further evidence on the recent increase in international consumption risk sharing. We show that this increase is more pronounced among EU and EMU countries than among non-E(M)U industrialised countries. We also show that the patterns of international but not intra-European risk sharing have started to diverge from what is found at the level of the OECD as a whole. During the 1990s, capital income flows have started to play a relatively more important role between European countries, whereas the increase in international risk sharing among the OECD as a whole is almost exclusively driven by better consumption smoothing through the accumulation or decumulation of foreign assets. This EMU effect on the pattern of risk sharing survives once we control for differences in international portfolio holdings: while we find that countries with higher equity cross-holdings also tend to share more risk through capital income flows there remains an independent EMU-effect on the way in which risk is shared. While it is too early to evaluate these findings conclusively, we discuss some possible interpretations and their implications for economic policy.

Keywords: Capital flows; Consumption Risk Sharing; EMU; Financial integration; Home Bias (search for similar items in EconPapers)
JEL-codes: C23 E21 F36 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2007-12
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