Financial Globalization, International Business Cycles, and Consumption Risk Sharing

Michael Artis and Mathias Hoffmann

No 346, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have been unable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.

Keywords: Consumption Risk Sharing; International Business Cycles; Great Moderation; Financial Integration and Capital Flows; Home Bias (search for similar items in EconPapers)
JEL-codes: C23 E21 F36 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-bec, nep-mac and nep-opm
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Citations: View citations in EconPapers (12)

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Journal Article: Financial Globalization, International Business Cycles and Consumption Risk Sharing* (2008)
Working Paper: Financial Globalization, International Business Cycles and Consumption Risk Sharing (2004)
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