Working Paper: CEPR ID: DP1074
Authors: Fabio Canova; Morten O. Ravn
Abstract: This paper examines whether or not consumption risk sharing occurs in a panel of industrialized countries. We derive the international consumption insurance proposition in a simple theoretical model and show how it should be modified in more complicated models. We analyse empirically the implications of the proposition for pairs of countries over cycles of different length, and find that aggregate domestic consumption is completely insured against idiosyncratic real, demographic, fiscal and monetary shocks, but that it co-varies with domestic variables over long or infinite cycles. Also, the cross equation restrictions imposed by the theory are, in general, rejected. The policy implications of the results are discussed.
Keywords: consumption insurance; international investments; capital mobility; long-run convergence
JEL Codes: D81; E32; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate consumption (E20) | consumption stability (E21) |
| demographic factors (J11) | consumption patterns (D10) |
| domestic conditions (F55) | consumption outcomes (E21) |