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Common correlated effects and international risk sharing

Peter Fuleky, Luigi Ventura () and Qianxue Zhao

No 201304, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: International risk sharing has been among the most actively researched areas of macroeconomics for the last two decades. Empirical contributions in this field make extensive use of so called "consumption insurance" tests evaluating the extent to which idiosyncratic shocks in income get transferred to consumption. A prerequisite of such a test is the isolation of country specific variation in the data. We show that the cross-sectional demeaning technique frequently used in the literature is in general inadequate to eliminate global factors from a panel data set, and can lead to misleading inference. We argue that international risk sharing tests should instead be based on a method that more reliably deals with global factors. We claim and illustrate in our empirical application that the fairly simple common correlated e ects estimator for cross-sectionally dependent panels introduced by Pesaran (2006), and Kapetanios et al. (2010) is a tool that satisfies this requirement.

Keywords: Panel data; Cross-sectional dependence; International risk sharing; Consumption insurance (search for similar items in EconPapers)
JEL-codes: C23 C51 E21 F36 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2013-03
New Economics Papers: this item is included in nep-ecm, nep-ias and nep-opm
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http://www.economics.hawaii.edu/research/workingpapers/WP_13-4.pdf First version, 2013 (application/pdf)

Related works:
Journal Article: Common correlated effects and international risk sharing (2018) Downloads
Working Paper: Common correlated effects and international risk sharing (2017) Downloads
Working Paper: Common correlated effects and international risk sharing (2016) Downloads
Working Paper: Common Correlated Effects and International Risk Sharing (2016) Downloads
Working Paper: Common correlated effects and international risk sharing (2013) Downloads
Working Paper: Common Correlated Effects and International Risk Sharing (2013) Downloads
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