The Home Bias and Capital Income Flows Between Countries and Regions

University of Zurich Working Paper No. 316

29 Pages Posted: 2 Apr 2007 Last revised: 25 Oct 2011

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)

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Date Written: March 1, 2007

Abstract

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states.

We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons.

Keywords: Consumption Risk Sharing, International and regional business cycles, Capital flows, Home Bias, Non-stationary panel data

JEL Classification: C23, E21, F36

Suggested Citation

Artis, Michael J. and Hoffmann, Mathias, The Home Bias and Capital Income Flows Between Countries and Regions (March 1, 2007). University of Zurich Working Paper No. 316, Available at SSRN: https://ssrn.com/abstract=976341 or http://dx.doi.org/10.2139/ssrn.976341

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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