Working Paper: CEPR ID: DP4677
Authors: Harry Huizinga; Dantao Zhu
Abstract: This Paper uses empirical proxies for the domestic development and international integration of debt and equity markets to assess the role of financial development in international consumption smoothing. First, we find that both domestic and international finance contribute to international consumption smoothing. Second, domestic debt market development is relatively important in explaining consumption smoothing relative to GNP among developed countries, while international debt market integration appears to be the limiting factor in developing countries. Third, both debt and equity market development contribute to the smoothing of consumption relative to GDP, with a somewhat larger role for the former than the latter. Finally, debt and equity market development reveal themselves to be substitutes in that more of one reduces the contribution of the other to consumption smoothing.
Keywords: Consumption smoothing; Financial development
JEL Codes: C33; F20; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic financial market development (O16) | Consumption smoothing (D15) |
| International financial integration (F30) | Consumption smoothing (D15) |
| Domestic debt market development (H63) | Consumption smoothing (D15) |
| Domestic debt market development (H63) | Consumption smoothing relative to GNP (E21) |
| Domestic equity market development (G10) | Consumption smoothing relative to GDP (E20) |
| International debt market integration (F34) | Consumption smoothing (D15) |
| Domestic and international financial market developments (F30) | Consumption smoothing (D15) |