Country Size, Aggregate Fluctuations, and International Risk Sharing

Allen Head ()

Canadian Journal of Economics, 1995, vol. 28, issue 4b, 1096-1119

Abstract: Country size, measured by either population or gross domestic product (GDP), is shown to be negatively related to the variances of aggregate output, consumption and investment and positively related to the contemporaneous correlations of consumption and investment with output in a sample of fifty-six countries. These results, however, hold primarily for the high income countries of the sample. A subsample consisting of the twenty countries with the lowest per capita GDP exhibits a significant negative relationship only between investment volatility and country size- these empirical regularities are shown to be consistent with the implications of international risk sharing among counties of asymmetric sizes in an international real business cycle model. Shocks in relatively large countries constitute world-wide risk to a greater extent than do similar shocks in smaller countries. Thus foreign shocks have a greater impact on small countries, causing their aggregates to fluctuate more and their consumption and investment to be less highly correlated with domestic output.

Date: 1995
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