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Risk Sharing among OECD and EU Countries: The Role of Capital Gains, Capital Income, Transfers, and Saving

Faruk Balli () and Bent Sorensen

MPRA Paper from University Library of Munich, Germany

Abstract: We estimate the amount of income and consumption smoothing (risk sharing) between OECD countries during the period 1970{2003 with a particular focus on EU and EMU countries. Income smoothing from international factor income has increased in the EU and, in particular, the EMU but not in the non-EU OECD since the introduction of the Euro. Consumption smoothing from pro-cyclical government saving has declined in the EMU, but not in the non-EU OECD, since the signing of the Maastricht treaty. We find that when capital gains and losses on international asset positions are considered part of income, the magnitude of capital gains leads to huge amounts of income smoothing and dis-smoothing although, at the time horizons we examine, the capital gains or losses are only weakly reflected in consumption. Understanding the role of capital gains in risk sharing appears to be of first order importance.

Keywords: Government De¯cits; Income Insurance; International Capital Markets; International Integration; Risk Sharing; External Capital Gains (search for similar items in EconPapers)
JEL-codes: F41 F36 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-opm
Date: 2007-12-02
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