What Can Explain the Apparent Lack of International Consumption Risk Sharing?
JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 2, April 1996
Posted: 29 May 1996
Recent research in international business cycles finds that international consumption co-movements do not match the risk- sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: 1) non-separabilities between tradables and non-tradable leisure or goods, and 2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both non-separabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.
JEL Classification: F30, F40, G1
Suggested Citation: Suggested Citation