Financial Globalization, International Business Cycles, and Consumption Risk Sharing

University of Zurich Institute for Empirical Research in Economics Working Paper No. 346

39 Pages Posted: 11 Dec 2007

See all articles by Michael J. Artis

Michael J. Artis

University of Manchester - Institute for Political & Economic Governance (IPEG)

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2007

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

JEL Classification: C23, E21, F36

Suggested Citation

Artis, Michael J. and Hoffmann, Mathias, Financial Globalization, International Business Cycles, and Consumption Risk Sharing (December 2007). University of Zurich Institute for Empirical Research in Economics Working Paper No. 346, Available at SSRN: https://ssrn.com/abstract=1069601 or http://dx.doi.org/10.2139/ssrn.1069601

Michael J. Artis (Contact Author)

University of Manchester - Institute for Political & Economic Governance (IPEG) ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Mathias Hoffmann

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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