International and Intranational Risk Sharing
CESifo Working Paper Series No. 227
29 Pages Posted: 16 Jun 2001
Date Written: December 1999
Abstract
This paper reviews three important issues in the literature on international and intranational risk sharing. First, we establish a comprehensive set of stylized facts for consumption risk sharing within and across countries. Consistent with the findings in the literature, we find that the correlation of our consumtion measure across countries is much less than that for output. As pointed to by Backus, Kehoe and Kydland (1993), this constitutes a violation of complete international risk sharing, which they labeled the ?quantity anomaly?. The findings using international data are contrasted with those using intranational data for Japanese prefectures, U.S. states and Canadian regions. Consistent with the findings by Crucini (1998) and Hess and Shin (1997, 1998), intranational data continues to demonstrate the quantity anomaly for the U.S., but not for Japan and Canada. Second, following the work by Crucini (1998), we estimate an econometric specification which allows us to quantify the extent of risk sharing within and across countries. The results indicate that, while still incomplete, a larger fraction of risk is shared within countries than across them. Finally, using these estimates of the current extent of risk sharing, we calculate the potential welfare benefits from additional international and intranational risk sharing.
JEL Classification: E20, E31, E32
Suggested Citation: Suggested Citation
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