Labour Market Rigidities, Financial Integration and International Risk Sharing in the OECD

Jarko Fidrmuc, Neil Foster-McGregor and Johann Scharler

No 2028, CESifo Working Paper Series from CESifo

Abstract: Economic theory predicts that consumption growth rates should be highly correlated across countries. Empirical evidence overwhelmingly rejects this prediction. We examine whether increased financial integration and labour market rigidities can help explain this apparent contradiction between theory and empirics. Using data for OECD countries we show that although financial integration has a limited impact upon cross-country consumption correlations, labour market rigidities significantly increase consumption correlations. The results suggest that labour market rigidities improve the allocation of consumption risks either by shifting risk from employees to firms and shareholders or because it makes future income streams easier to use as collateral.

Keywords: consumption correlation puzzle; financial integration; foreign direct investment; employment protection (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2028

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