The Home Bias and Capital Income Flows between Countries and Regions

Michael Artis and Mathias Hoffmann

No 316, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons.

Keywords: Consumption Risk Sharing; International and regional business cycles; Capital flows; Home Bias; Non-stationary panel data (search for similar items in EconPapers)
JEL-codes: C23 E21 F36 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.zora.uzh.ch/id/eprint/52271/1/iewwp316.pdf (application/pdf)

Related works:
Working Paper: The Home Bias and Capital Income Flows between Countries and Regions (2006)
Working Paper: The Home Bias and Capital Income Flows between Countries and Regions (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:316

Access Statistics for this paper

More papers in IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich
Bibliographic data for series maintained by Severin Oswald ().