Intra- and International Risk-Sharing in the Short Run and the Long Run

40 Pages Posted: 28 Jan 2004

See all articles by Sascha O. Becker

Sascha O. Becker

Monash University - Department of Economics; University of Warwick

Mathias Hoffmann

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

Date Written: December 2003

Abstract

We investigate empirically how industrialized countries and U.S. states share consumption risk at horizons between one and thirty years. U.S. federal states share about 50 percent of their permanent idiosyncratic risk through cross-state capital income flows. While insurance against transitory fluctuations in output is virtually complete, OECD countries do not share any of their permanent idiosyncratic risk. Our results suggest that purely transaction cost based theories cannot explain the home bias, since the potential welfare gains from insurance against permanent shocks would by far outweigh that of insuring against transitory variation. We conclude that permanent and transitory shocks constitute two qualitatively different kinds of risk and that various forms of endogenous market incompleteness may render permanent shocks a lot harder to insure, in particular at the international level.

Keywords: consumption risk sharing, home bias, international business cycles, panel vector

JEL Classification: F36, F41

Suggested Citation

Becker, Sascha O. and Hoffmann, Mathias, Intra- and International Risk-Sharing in the Short Run and the Long Run (December 2003). Available at SSRN: https://ssrn.com/abstract=489482

Sascha O. Becker (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
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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