International Risk-Taking, Volatility, and Consumption Growth
64 Pages Posted: 17 Dec 2006
Date Written: November 2006
We show that countries that take on more international risk are rewarded with higher expected consumption growth. International risk is defined as the beta of a country's consumption growth with world consumption growth. High-beta countries hold more foreign assets, as predicted by the theory. Despite the positive effects of beta, a country's idiosyncratic volatility is negatively correlated with expected consumption growth. Therefore, uninsured shocks affect not only current growth, but also future consumption growth. High-volatility countries have worse net foreign asset positions, suggesting that solvency constraints limit their future growth.
JEL Classification: E21, F3, G1, O16, O4
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