Working Paper: NBER ID: w16789
Authors: Marianne Baxter
Abstract: International risk-sharing has far-reaching implications both for economic policy and for basic research in economics. When countries do not share risk, individuals in those countries experience fluctuations in their consumption levels that are undesirable and possibly unnecessary. This paper extends and refines the study of international risk-sharing in two dimensions. First, this paper investigates risk-sharing at short vs. long horizons. Countries might, for example, pool risks associated with high-frequency shocks (e.g., seasonal fluctuations in crop yields) but might not share risks associated with low frequency shocks (e.g., different long-run national growth rates). Second, this paper studies bilateral risk-sharing, which is different from the approach taken in most previous studies. We find that there is evidence of substantial international risk-sharing at medium and low frequencies. There is evidence of high and increasing risk-sharing within Europe that is not apparent for other regions of the world.
Keywords: International risk sharing; Consumption fluctuations; Bilateral risk sharing
JEL Codes: E21; E32; F11; F15; F2; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International risk sharing is substantial at medium and low frequencies (G15) | Countries pooling risks associated with longer-term shocks (F65) |
| High correlation of consumption growth rates (F62) | Effective risk sharing (G22) |
| Correlation of consumption growth rates at short horizons (k=1) is lower than at longer horizons (k=16) (E21) | Measurement of risk sharing is sensitive to the time frame considered (C41) |
| Bilateral risk sharing varies based on financial linkages and proximity (F65) | Smaller countries show higher correlations with their largest trading partners (F10) |
| Measurement error in consumption data (D12) | Bias results against finding evidence of risk sharing (D81) |