What Can Explain the Apparent Lack of International Consumption Risk Sharing?

38 Pages Posted: 10 Jun 2000 Last revised: 21 Sep 2022

See all articles by Karen K. Lewis

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1995


Recent research in international business cycles based upon complete markets has found that international consumption correlations are lower than predicted by the standard risk-sharing implications of these models. In this paper, I use regression tests to ask whether two different types of explanations can help explain this result. First, I consider whether non-separabilities between tradeables and non-tradeable leisure or goods can explain the puzzle. Surprisingly, non-separabilities explain only a tiny fraction of the variation in tradeables consumption across countries. Furthermore, risk-sharing in tradeables is rejected. Second, I examine the effects of capital market restrictions on aggregate consumption risk-sharing by countries. While rejections of risk-sharing are stronger for countries facing more severe capital market restrictions, risk-sharing is still rejected for the unrestricted group of countries. Therefore, risk-sharing does not appear to be resolved by either explanation alone. However, when I allow for both non-separabilities and certain market restrictions, risk-sharing among unrestricted countries is not rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk-sharing across countries.

Suggested Citation

Lewis, Karen Kay, What Can Explain the Apparent Lack of International Consumption Risk Sharing? (August 1995). NBER Working Paper No. w5203, Available at SSRN: https://ssrn.com/abstract=225267

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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