Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments

Faruk Balli, Syed Abul Basher and Hatice Balli

MPRA Paper from University Library of Munich, Germany

Abstract: We document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from outflows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income outflows (18 percent for the EMU and 16 percent for the EU). Factor income outflows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income outflows provide insurance against negative output shocks. In terms of the determinants of income smoothing, results indicate that an increase in foreign equity and debt liabilities positively affect the extent of smoothing via factor income outflows. Whereas, contrary to the current literature, an increase in foreign assets holding does not have a positive impact on smoothing via factor income inflows. The tendency of European investors' in allocating a sizeable portion of their assets within the Euro zone is shown to undermine income smoothing.

Keywords: Factor income flows; Consumption smoothing; Income smoothing; International portfolio diversification. (search for similar items in EconPapers)
JEL-codes: F36 (search for similar items in EconPapers)
Date: 2011-02-13
New Economics Papers: this item is included in nep-eec, nep-ias and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Journal Article: Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments (2011)
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