international consumption risk sharing this paper formally examines the implications of international consumption risk sharing for a panel of industrialized countries we theoretically derive the international consumption insurance proposition in a simple setup and show how to modify it in more complicated models we analyze the implications of the theory for pairs of countries and find that aggregate domestic consumption is almost completely insured against idiosyncratic real demographic fiscal and monetary shocks over short cycles but that it covaries with these variables over medium and long cycles the cross equation restrictions imposed by the theory are rejected the policy implications are discussed

banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

unraveling the complex interrelationships between exchange rates and fundamentals abstract this research investigates the intrinsic characteristics of currency values by fundamentally decomposing investor expectations on 16 currencies the results on 195 exchange rates over several decades indicate investors perceive countries to be more likely to choose devaluation solutions to bop problems when inflation is lower and when an alternative drop in real income growth is more painful in addition empirical support is provided for the hypothesis that forward rates often appear biased because the distributional expectations incorporated into them include for a country with a current account deficit a small probability of a large spot decline that does not actually occur in most finite samples

intertemporal labor supply and long term employment contracts the authors compare the implications of a symmetric information contracting model and a dynamic labor supply model for changes in earnings and hours a simple test is whether earnings changes are more variable than hours changes as predicted by the labor supply model or less variable as predicted by the contracting model the authors apply this test to two longitudinal surveys of adult men and find that earnings are somewhat more variable than hours for men who never change employers the estimates suggest that changes in earnings and hours not associated with survey measurement error occur at fixed wage rates copyright 1987 by american economic association

optimal liberalization of financial markets abstract as financial markets become completely liberalized countries gain from improved risk sharing but less wealthy countries can no longer profit from borrowing abroad at the lower rate and reinvesting at home at the higher rate with decreasing rather than constant returns to capital the gain from risk sharing is more likely to dominate the loss of the difference between the borrowing rate abroad and the decreasing reinvestment rate at home complete liberalization is likely to be optimal for less wealthy countries unless their labor endowment is large their productivity is large or holdings by foreigners are small as in china

the fundamental determinants of interest rate differentials in the erm the paper analyses the sources of persistent interest rate differentials vis a vis germany that have existed in belgium denmark france ireland italy and the netherlands in a target zone system like the erm interest rate differentials mainly reflect devaluation expectations which are measured here by raw 1 month euromarket interest rate differentials drift adjusted 1 month differentials and differentials in long term government bond yields the role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive var setting by means of granger causality tests impulse response functions and variance decompositions we find no evidence that fundamentals are more relevant to drift adjusted devaluation risk than for unadjusted interest rate differentials a significant impact of inflation budget deficits and unemployment becomes evident for almost all erm participants

testing the response of consumption to income changes with noisy panel data this paper tests the rational expectations lifecycle model of consumption against i a keynesian model and ii the rational expectations lifecycle model with imperfect capital markets the tests are based upon the relative responsiveness of consumption to income changes that can be predicted from past information and income changes that cannot he predicted the tests allow for measurement error in income the results reject the keynesian model and generally support the lifecycle model but the results are not sufficiently precise to rule out the possibility that some households are liquidity constrained measurement error has a strong influence on the relationship between consumption and income

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

international capital market imperfections evidence from geographical features of international consumption risk sharing this article attempts to rationalize the validity of gravity variables to explain the degree of international consumption risk sharing we find that for a panel of 54 countries during 1950 2000 variables such as distance affluence a common language and the type of legal system are relevant in explaining not only cross country consumption and output correlations but consumption risk sharing common law countries share consumption risks more than civil law countries english speaking countries turn out to share consumption risks more than other language groups and show significantly higher consumption risk sharing even within the group of common law countries

structural adjustment and the construction sector abstract this paper adds a construction sector to a dynamic dependent economy model equipped with consumer tradeables and non tradeables sectors the model is used to study the response of the production structure relative prices and the trade balance to a favorable terms of trade shock under the benchmark assumptions of perfect intersectoral factor mobility a perfect international capital market and no adjustment costs for realistic relative capital intensities the model predicts a boom in the construction and consumer non tradeables sectors a contraction of the tradeables sector and no relative price changes the implications of relaxing those benchmark assumptions are discussed separately

can nontradables generate substantial home bias the past decade has witnessed an increase in the fraction of equity portfolios invested abroad as barriers to international asset trade have significantly declined what are the long run implications of this process in this paper we investigate to what extent nontradables consumption and leisure can affect the portfolio allocation decision in otherwise integrated capital markets we find that hedging against nontradables shocks can account for only a small portfolio bias toward domestic assets these results suggest that in the near future we can expect to observe sizable additional international diversification

international capital mobility net versus gross stocks and flows abstract feldstein and horioka 1980 observed that net capital flows have been small in relation to domestic saving and investment flows for oecd countries in the post war period which they interpreted as evidence of low capital mobility this paper argues that the correlation between gross domestic and international financial flows can be a better indicator of capital mobilitythan net capital flows contrary to the conventional wisdom among international economists gross flows have been small in relation to gross domestic asset creation for oecd countries although by this measure the degree of capital mobility increased in the 1980s

optimal portfolio choice and the collapse of a fixed exchange rate regime abstract a model is presented that accounts for empirical macroeconomic regularities accompanying exchange rate crises assuming the central bank can surprise the private sector about its monetary policy we solve for agents consumption and portfolio decisions and the economy s equilibrium prices and interest rates using an intertemporal asset pricing model prior to a collapse a peso problem will always exist and the central bank will lose reserves in excess of domestic credit creation at the time of the collapse the exchange rate may depreciate unexpectedly the dynamics of a country s return to fixed exchange rates are also analyzed

consumption fluctuations and welfare evidence from china summary this paper examines inter provincial consumption risk sharing and intertemporal consumption smoothing across chinese provinces before and after the 1979 economic reform our results indicate that the degree of consumption risk sharing among chinese provinces is lower than that within the united states and across the national boundaries of oecd countries on the other hand the level of consumption smoothing among chinese provinces is higher than that across oecd or european union countries but lower than that in the united states moreover our results show that consumption risk sharing and smoothing in china have deteriorated since the 1979 economic reform finally we show that eliminating consumption fluctuations yields substantial welfare gains which suggests that stabilization policies are desirable for china

risk pooling between households and risk coping measures in developing countries evidence from rural bangladesh abstract using data from rural bangladesh i test whether income risks are pooled among villagers between neighboring households and between related households living in different villages i find evidence that risks to food consumption are pooled between neighboring households and between related households but not among villagers as for nonfood consumption i find little evidence of risk pooling except between unrelated neighboring households i also find that while households belonging to a neighborhood network do not take any special measures during an economic hardship those not belonging to any such network try to smooth consumption by selling off livestock and other assets and by getting interest free loans negative income shocks are found to have little effect on labor supply or private transfers

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

bad investments and missed opportunities postwar capital flows to asia and latin america since 1950 the economies of east asia grew rapidly but received little inter national capital while latin america received considerable international capitaleven as their economies stagnated the literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections this paper proposes a broader thesis that country specificdistortions such as domestic labor and capital market distortions also impactcapital flows we develop a dsge model of asia latin america and the rest ofthe world that features an open economy business cycle accounting framework tomeasure these domestic and international distortions and to quantify their con tributions to international capital flows we find that domestic distortions havebeen the predominant drivers of international capital flows and that the generalequilibrium effects of these distortions are very large international capital market distortions also matter but less

the welfare cost of macroeconomic uncertainty in the post war period abstract with standard assumptions on preferences and a fully fledged econometric model we computed the welfare costs of macroeconomic uncertainty for post war u s using the beveridge nelson decomposition welfare costs are about 0 9 per capita consumption 175 77 a year and marginal welfare costs are about twice as large

an intertemporal model of international capital market segmentation this paper develops an intertemporal model of international capital market segmentation within the model under various forms of segmentation integration the equilibrium asset prices and allocations the risk free interest rate and the intertemporal consumption behavior and welfares of two countries are derived and compared it is shown that the equilibrium interest rate is increased on integration and that integrating markets may be significantly welfare decreasing for one of the countries conditions that may lead to a decrease in welfare are investigated the conclusions as to the effects of segmentation on asset prices in the mean variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model

price stability with imperfect financial integration this paper studies whether the international monetary system can be affected by asymmetries in the cross country positions in the international financial markets i e the fact that some countries are large debtors while others are creditors an important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country the main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases 1 of a permanent shift in steady state consumption for the welfare costs of incomplete markets and 0 2 for the gains of deviating from a policy of price stability when global imbalances become larger optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates which should happen to be more correlated across countries

speculative currency attacks and balance of payments crises abstract this paper reviews the recent theoretical literature on collapsing exchange rate regimes using a combination of technique intuition and realworld observation we discuss the literature s main insights point out some unresolved questions and offer suggestions for future research the survey should be of interest to both specialists and non specialists in the field of international macroeconomics

optimal financial market integration and security design 1 we study 2 period pure exchange capital asset pricing model capm economies with incomplete financial markets and restricted participation we characterize the optimal financial market structure and efficient innovations consisting of both the introduction of new assets and the integration of segmented markets welfare gains from innovations are maximal when the endowments of affected agents are negatively correlated uncoordinated innovations lead to efficient market structures if all assets have identical participation structure or the markets being integrated trade identical assets however coordination failure in the introduction of new assets may result when assets have participation structures that overlap only partially

balance of payments crises and devaluation the collapse of a fixed exchange rate is typically marked by a sudden balance of payments crisis in which speculators fleeing from the domestic currency acquire a large portion of the central bank s foreign exchange holdings faced with such an attack the central bank often withdraws temporarily from the foreign exchange market allowing the exchange rate to float freely before devaluing and returning to a fixed rate regime this paper links the timing of the initial speculative attack to the magnitude of the expected devaluation and to the length of the transitional period off loating an implication of the analysis is that there exist devaluations so sharp and transition periods so short that acrisis must occur the moment the market first learns that the current exchange parity will eventually be altered for sufficiently long transition periods the floating exchange rate overshoots its new peg before appreciating back toward it for shorter periods the rate depreciates monotonically to its new fixed level accordingly the central bank s return tothe foreign exchange market can occasion a capital outflow or a capital inflow this abstract was borrowed from another version of this item

information communication technology and electricity consumption in emerging economies abstract this study examines the impact of information communication technology ict on electricity consumption in emerging economies the empirical results obtained from dynamic panel demand models show a positive and statistically significant relationship between ict and electricity consumption when ict is measured using internet connections mobile phones or the number of pcs long run ict elasticities are smaller than income elasticities but because ict growth rates are so much higher than income growth rates the impact of ict on electricity demand is greater than the impact of income on electricity demand one implication of these results is that policies designed to close the digital divide between developed and developing economics by increasing the adoption of ict in developing countries are put at odds with energy policies to reduce ghg emissions

financial integration and consumption smoothing we test if financial integration improves household consumption smoothing using microeconomic data we find that the process of financial market integration and liberalisation brought about by the introduction of the euro has not affected the sensitivity of consumption with respect to income shocks in italy this article also makes a significant contribution from a methodological point of view because our procedure does not require that consumption and income are available in the same panel data set it can therefore be applied in all countries in which repeated cross sectional consumption data can be combined with panel data on income

substitution of information for energy conceptual background realities and limits abstract the substitution of information for energy is a dominant phenomenon in economic activities but this substitution is very particular compared to the substitution among factors of production because information does not have the properties of a factor of production this article attempts to understand how information substitutes for energy

consumption risk sharing in china this paper empirically examines the degree of regional consumption risk sharing in china it finds that less risk sharing is taking place across chinese provinces than across us states and canadian provinces although its extent across the latter is somewhat higher than across the national boundaries of industrial countries specifically about half of the fitted annual variation in provincial consumption growth is common to all chinese provinces compared with more than two thirds less than one third in the case of us states and canadian provinces g 7 countries my estimates reveal that chinese households would be willing to pay dearly to insure their consumption against idiosyncratic shocks

from institutions to financial development and growth what are the links this paper presents an integrated overview of the literature linking institutions financial development and economic growth from the large body of research on institutional development the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating worsening the information frictions and transaction costs that characterize the development of financial markets the paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development

empirical relationships between the energy and information segments of the us economy an input output approach abstract maxwell s demon in 1871 introduced in science the possibility of using information to generate free energy since that time researchers have been speculating about the implications of information for energy use recent studies indicate the substitutability between energy and information in the so called information economies these studies suggest that information in general and information technologies in particular have the potential to save energy in this paper an input output approach is employed to search for empirical evidence of substitutability between energy and information at a national economic level the development of information activities in the united states economy is studied from 1963 to 1987 and the contribution of information to save energy is indicated results show an increasing presence of information activities in all segments of the economy and strong evidence of their contribution to energy savings

how big are potential welfare gains from international risksharing abstract there is extensive evidence that risksharing across countries is far from perfect some have attributed this to small benefits from risksharing gains from riskpooling that have been reported range from negligible to enormous this paper documents to what extent the results are sensitive to the parameterization of preferences the stochastic process of the endowment and its measurement we find that gains from risksharing are quite sizable for realistic assumptions about the underlying factors for oecd countries they are equivalent to a permanent increase in tradables consumption in the range of 1 1 to 3 5 for a 50 year horizon and 2 5 to 7 4 for a 100 year horizon

international risk sharing and european monetary unification abstract we explore income and consumption smoothing patterns among european community ec countries and among oecd countries during the period 1966 90 we find that for oecd as well as for ec countries about 40 percent of shocks to gdp are smoothed at the one year frequency with about half the smoothing achieved through national government budget deficits and half by corporate saving at the three year differencing frequency only 25 percent of shocks to gdp are smoothed mainly via government lending and borrowing in the absence of alternative income and consumption smoothing mechanisms the restrictions on budget deficits imposed by the maastricht treaty should be relaxed to allow governments to run large temporary deficits in response to output shocks

labour market institutions and household consumption insurance within oecd countries this paper tests empirically whether the effect of idiosyncratic income shocks on aggregate consumption depends on institutional features of national labour markets the results show that in a sample of 15 oecd countries institutional heterogeneity is a significant determinant of the response of household consumption to country specific income shocks this is consistent with the idea that institutionally provided social insurance may help increase income stability when people differ in their ability to access financial markets and smooth consumption fluctuations

balance of payments crises in an optimal portfolio model abstract balance of payments crises are often associated with large current account movements preceding and following the crises in this paper we treat the issue of balance of payments crises in a general equilibrium model to allow for such current account movements at the same time we model the portfolio decisions of the individuals in an explicit risk and return framework the resulting behavior for money demand foreign exchange reserves and current account is derived most importantly the risk and return framework allows for a discussion of the influence of uncertain government domestic credit policies on the current account behavior preceding the attack and on the probability of an attack

growth and risk sharing with private information abstract we examine the impact of incomplete risk sharing on growth and welfare the source of market incompleteness in our economy is private information a household s idiosyncratic productivity shock is not observable by others risk sharing between households occurs through long term contracts with intermediaries we find that incomplete risk sharing tends to reduce the rate of growth relative to the complete risk sharing benchmark numerical examples indicate that the welfare cost and the growth effect of private information are small

terms of trade risk with partial labor mobility abstract we examine the welfare consequences of terms of trade risk in a small open economy in which it is costly for workers to move between sectors relocation costs lead to partial labor mobility sectoral wage gaps and income risk exceeding that of an economy in which relocation is costless using observed wage differentials and standard values for volatility and preferences we find that the welfare cost of partial labor mobility alone is unlikely to be very large even in the absence of self insurance arrangements in addition modest consumption substitution elasticities significantly reduce these welfare costs

country size aggregate fluctuations and international risk sharing country size measured by either population or gross domestic product gdp is shown to be negatively related to the variances of aggregate output consumption and in vestment and positively related to the contemporaneous correlations of consumption and investment with output in a sample of fifty six countries these results however hold pri marily for the high income countries of the sample a subsample consisting of the twenty countries with the lowest per capita gdp exhibits a significant negative relationship only between investment volatility and country size these empirical regularities are shown to be consistent with the implications of international risk sharing among countries of asymmetric sizes in an international real business cycle model shocks in relatively large countries con stitute world wide risk to a greater extent than do similar shocks in smaller countries thus foreign shocks have a greater impact on small countries causing their aggregates to fluc tuate more and their consumption and investment to be less highly correlated with domestic output

intranational risk sharing and its determinants abstract we develop a model of risk sharing in which agents can pool their consumption risks in both national and local markets and then smooth the remaining consumption fluctuations with credit markets estimating the model with a unique dataset on chinese cities we find that the participation rate in risk sharing is low but upon entering the market agents tend to pool risk in the national market rather than the local market the welfare gain from reaching the perfect consumption risk sharing at the national market could be as large as 4 of the perpetual deterministic consumption flow however conditional on the estimated degree of risk sharing participation the welfare gain from pooling all income risks at the national market is only 0 1 empirical analysis on the determinants of city risk sharing reveals that the degree of risk sharing depends on initial economic development and share of gdp contributed by tertiary industry

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

risk sharing with limited commitment and preference heterogeneity structural estimation and testing in order to analyze the role of limited commitment and preference heterogeneity in explaining the consumption allocation i propose a theoretical and empirical framework to estimate and evaluate a risk sharing model where insurance transfers have to be self enforcing and the coefficient of relative risk aversion may depend on observable household characteristics i compare this model to benchmark models with full commitment and or without preference heterogeneity using data from three indian villages i find that the limited commitment model with heterogeneous preferences outperforms the benchmark models in a statistical sense and in terms of i explaining the dynamic response of consumption to idiosyncratic income shocks ii accounting for the variation of consumption unexplained by household and time effects and iii capturing the variation of inequality across time and villages and predicting changes in inequality i also use the estimated models to predict the effects of a counterfactual tax and transfer policy on the consumption allocation the limited commitment model with preference heterogeneity predicts larger benefits to the poor than its homogeneous counterpart

risk sharing from international factor income explaining cross country differences access to world capital markets and net investment income flows between countries help protect national income from country specific output shocks i empirically study what factors explain cross country differences in the extent of risk sharing from international factor income an index of investor protection is the leading causal variable for the estimated amount of risk sharing over the 1985 to 2004 period improving investor protection in russia to denmark s level implies five times larger risk sharing compared to the sample average these results indicate one possible way to reap large potential benefits from international risk sharing

gains from financial integration in the european union evidence for new and old members abstract we estimate the benefits of financial integration resulting from international risk sharing among the 25 eu countries under full risk sharing country specific output shocks are diversified across the eu members and output volatility of an individual country is not reflected in its consumption the gains from risk sharing are expressed as the utility equivalent of a permanent increase in consumption we report positive potential welfare gains for all the eu countries if they move toward full risk sharing ten country members who joined the union in 2004 would potentially obtain much higher gains than the longer standing 15 members

habit persistence and welfare gains from international asset trade we introduce habit formation in a model that studies the link between international trade in financial assets economic growth and welfare as with time separable preferences asset trade increases the mean growth rate but it also increases growth volatility we demonstrate that the welfare gain from asset trade is lower with habit persistence in consumption this reflects that the habit forming households perceive the higher growth volatility as a higher cost to obtain increased average growth calibrating the model to data for north america and western europe we find that habit persistence lowers welfare gains of financial integration by about 40 50

financial integration and growth in a risky world abstract we revisit the debate on the benefits of financial integration in a two country neoclassical growth model with aggregate uncertainty the framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing together with their interaction global numerical methods allow for meaningful welfare comparisons gains from integration are quantitatively small even for riskier and capital scarce emerging economies these countries import capital for efficiency reasons before exporting it for self insurance leading to capital flows and growth reversals along the transition this opens the door to richer empirical implications than previously considered in the literature

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

consumption smoothing channels in open economies abstract many intertemporal open economy macro models imply a theory of consumption smoothing channels thus we build an empirical model to analyze the intertemporal smoothing role of saving components fixed investments inventories and trade balance through the use of var impulse responses to different types of shocks we find that for the oecd countries the bulk of intertemporal smoothing has been carried out domestically via gross fixed investments and inventories but the trade balance has also played a relevant albeit volatile smoothing role we also characterize the dynamic behavior of each component the trade balance and inventories are mostly used as short run smoothing tools while fixed investment provides more and more smoothing over time we can also address some empirical puzzles such as the excess sensitivity of investment anomaly glick r rogoff k 1995 global versus country specific productivity shocks and the current account journal of monetary economics 35 159 192 and the saving investment correlation puzzle feldstein m horioka c 1980 domestic saving and international capital flows economic journal 90 314 329

world income components measuring and exploiting risk sharing opportunities a method is constructedfor decomposing the variance of changes in incomes in the world into components to indicate the most important risk sharing opportunities among people of the world a constant absolute risk premium carp model an intertemporal general equilibrium model of the world is presented to permit optimal contract design for a contract designer maximizing a social welfare function the optimal contracts maximize the equilibrium world real interest rate securities are defined in terms of eigenvectors of a transformed variance matrix the method is applied using penn world table data on the g 7 countries 1950

dynamic risksharing in the united states and europe abstract we use a panel var model to improve upon the existing methodologies to analyze interregional risksharing and consumption smoothing channels first we endogenize the output process within a more general multi equation framework capturing the dynamic feedback between output and various smoothing channels second in line with dynamic general equilibrium open economy models of risksharing we exploit impulse response functions to trace the role of each smoothing channel over time in the presence of different structural shocks temporary vs permanent and output vs smoothing channels in the application to the us and oecd countries we find different dynamic properties of different smoothing channels we compare our results with the predictions of standard risksharing and consumption theories and tackle some of the puzzles in the literature such as the international risksharing puzzle and the consumption output correlation puzzle we are also able to address such policy issues as whether fiscal stabilizers have been substitutes or complements for financial market diversification activities and whether further financial market integration is likely to provide countries with more shock absorption tools a key result is the strong substitutability between capital and credit smoothing in the us and between fiscal and credit smoothing in the oecd

a multi country real business cycle model with heterogeneous agents a multicountry real business cycle model is developed capturing two important aspects of heterogeneity found in household survey data only a small fraction of the population holds stock and a significant fraction of nonstockholders are borrowing constrained the model is applied to data for twenty oecd countries it generates cross country consumption correlations consistent with those observed in the data potential welfare gains from international portfolio diversification by stockholders are large leaving the observed home bias as a significant puzzle the model can also account for the finding in u s data that consumption of stockholders is more volatile than that of nonstockholders copyright 1996 by the editors of the scandinavian journal of economics

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

collapsing exchange rate regimes abstract the paper develops models of speculative runs and collapse of fixed exchange rate regimes which result from credit policies that are ultimately inconsistent with a fixed exchange rate while no substantially new results are offered the formulation itself is of interest in highlighting the important ideas that have emerged in this area we modify the flood garber model to make the analysis more comparable with the deterministic case specifically we assume that the money growth process is specified in terms of growth rates rather than absolute increments and as a uniform rather than exponential distribution the modified analysis lends itself to a simple geometric interpretation of the krugman and flood garber models highlighting the important difference between the deterministic and stochastic models in the former the speculative attack run is concentrated in the latter the transition to floating is diffuse reserve losses exceed increases in domestic credit because of a rising probability of transition and reserve depletion accelerates on the way to the regime change

consumption risk sharing in italy this paper analyses the issue of consumption risk sharing in the 20 italian regions during the period 1983 94 the tests proposed allow for regional specific departures from the hypothesis of complete risk sharing and for the existence of non separabilities among groups of commodities empirical evidence suggests the rejection of the hypothesis of complete consumption risk sharing

on the welfare costs of business cycle fluctuations and economic growth variation in the 20th century and beyond lucas 1987 has shown a surprising result in business cycle research the welfare cost of business cycles are very small our paper has several original contributions first in computing welfare costs we propose a novel setup that separates the eects of uncertainty stemming from business cycle uctuations and economic growth variation second we extend the sample from which to compute the moments of consumption the whole of the literature chose primarily to we gratefully acknowledge the comments of caio almeida carlos e da costa robert f engle pedro c ferreira antonio fiorencio rodolfo manuelli samuel pessoa and octavio tourinho on this or on earlier versions of this paper all errors are ours we thank cnpq brazil faperj and inct for nancial support y corresponding author

financial policy and speculative runs with a crawling peg argentina 1979 1981 abstract in this paper we present a model of a balance of payments crisis and examine the argentine experiment with a crawling peg between december 1978 and february 1981 the approach taken allows us to examine the evolution of a crisis when a collapse is not perfectly foreseen and yields plausible estimates of one month ahead probabilities of a collapse of the crawling peg the results suggest that the viability of an exchange rate regime depends on the consistency of exchange rate policy with domestic credit policy if the two are not consistent confidence in exchange rate policy is undermined

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

on the empirics of risk sharing across mena countries in this article we compute the potential welfare gains and the realized gains from risk sharing among middle east and north african mena countries including the oil rich gulf region and the resource scarce economies we find that the overall potential welfare gains across mena countries are positive for all countries under the assumption of full risk sharing the potential welfare gains among the six gulf cooperation council gcc countries are positive even though the magnitudes are smaller compared to those of the rest of the mena region we also quantify the extent of risk sharing for the mena region and show that it is significant for the mena region and its subgroups however we could not find any sign of inter temporal smoothing across the same groups decomposing the aggregate output shocks shows that the extent of risk sharing is significant when only positive output shocks exist across the resource scarce mena economies however we observe that gcc countries share output risks with each oth

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

consumption smoothing and housing capital gains evidence from australia canada and new zealand using regional level panel data of three developed countries comprising australia canada and new zealand the study investigates the response of consumption smoothing to housing capital gains t

from earnings inequality to consumption inequality this paper studies the paths from inequality in earnings to inequality in household consumption we show that careful study of the evolution of the variances and covariances of earnings and consumption within cohorts across time can identify permanent and transitory shocks we present an application to the evolution of inequality in the united kingdom we extend previous results to recognise separate earnings of partners in couples

determinants of risk sharing through remittances abstract the sending of remittances is a decentralised decision of migrant workers nevertheless it has macroeconomic implications in providing insurance against domestic output shocks in the recipient economies a phenomenon known in literature as risk sharing income smoothing using a large sample of 86 developing countries for the period 1990 2010 we establish that remittance inflows serve as an important channel through which risk sharing takes place in the developing world the extent of income smoothing via remittances stands at around 5 on average subsequently we explore the underlying factors that explain countries ability to share risk through remittances the diversification of migrants turns out to be the leading explanation for the extent of risk sharing via remittances the more diverse the migration destinations of a country the higher the amount of risk shared in addition the size of remittance flows appears to have a strong and statistically significant impact on enhancing risk sharing we also find suggestive evidence that a higher proportion of remittances originating from farther countries facilitate more risk sharing compared to those originating from neighbouring or regional economies

risk sharing role of foreign aid in developing countries abstractthe effects of foreign aid on economic growth have been extensively investigated over the past 40 years however even though foreign aid can be a significant source of insurance against do

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

insuring consumption against illness one of the most sizable and least predictable shocks to economic opportunities in developing countries is major illness we investigate the extent to which families are able to insure consumption against major illness using a unique panel data set from indonesia that combines excellent measures of health status with consumption information we find that there are significant economic costs associated with major illness and that there is very imperfect insurance of consumption over illness episodes these estimates suggest that public disability insurance or subsidies for medical care may improve welfare by providing consumption insurance

capital controls and foreign exchange market crises in the ems abstract it is widely held that capital controls are necessary to prevent foreign exchange market crises in a fixed but adjustable exchange rate system like the ems it was therefore argued that capital market liberalization which came in july 1990 might lead to recurrent crises in the ems events since july 1990 have shown that capital controls were not necessary for the stability of the ems this paper shows that even with capital controls the system might enter turbulent periods and might experience a self fulfilling balance of payments crisis if the authorities are perceived to dislike high domestic interest rates a crisis can then be triggered by any small shock if the authorities are not willing to raise domestic interest rates sufficiently to defend the exchange rate

consumption and aggregate constraints evidence from u s states and canadian provinces state level consumption exhibits excess sensitivity to lagged income to the same extent as u s aggregate data but state specific idiosyncratic consumption exhibits substantially less sensitivity to lagged state specific income a result that also holds for canadian provinces we propose the following interpretation borrowing and lending in response to changes in consumer demand are easier for individual u s states than for the united states as a whole and therefore the measured deviation from the benchmark permanent income hypothesis model is smaller however lagged state specific variables help predict state specific consumption suggesting that the pih model still requires qualification

on the path of integration in the gulf region it is examined whether the six countries comprising the gulf cooperation council gcc are sufficiently compatible to form a viable economic and financial block in the gulf region despite long and numerous governmental attempts since the mid 1980s and in spite of public pressures to expedite the process these countries have thus far failed to achieve full economic and financial integration empirical evidence suggests that this apparent failure is unlikely the outcome of economic or financial incompatibility among the countries in the region the results imply that more efforts should be directed at resolving possible sociopolitical differences that may have hampered real progress toward the emergence of a genuine and effective bloc in the gulf region

home bias and international risk sharing twin puzzles separated at birth abstract we document that international home bias in debt and equity holdings declined during the period 1993 2003 at the same time as international risk sharing increased using panel data regressions for oecd countries we demonstrate that less home bias is associated with more international risk sharing more generally we show that more financial integration is associated with more risk sharing when we measure financial integration as the ratio of foreign assets to gross domestic product our results indicate that risk sharing and international financial integration are closely related empirical phenomena

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in

international risk sharing and capital mobility abstract under certain assumptions pareto efficient risk sharing implies that changes in consumption across nations will be perfectly correlated this result leads to an indicator of the welfare loss due to imperfect sharing of consumption risks across nations this indicator is used to evaluate the welfare implications of restrictions on various components of the international capital flow holding constant other components of the flow and domestic investment we find that variability in national consumption growth rates would have been considerably greater if capital flows had been restricted and that welfare would have been reduced significantly

a state transformed by information texas regional economy in the 1990s tu w and sui d z a state transformed by information texas regional economy in the 1990s regional studies the structural change of the texas regional economy in the 1990s is analysed using input output and shift share analyses as the fastest growing economic sectors in all thirteen texas regions the information segment is also found to be more important as an input factor in the production processes the informatization of the texas economy is found to be accompanied by a widening development gap between the core and the periphery region in the state a better understanding of the dynamics of growth processes and spatial patterns of the information economy is essential to prepare for future regional development plans tu w et sui d z un etat transforme par l information l economie regionale de texas dans les annees 1990 regional studies on analyse la transformation structurelle de l economie regionale de texas dans les annees 1990 a partir des tableaux des echanges interindustriels et d une

growth volatility and financial liberalization we examine the effects of both equity market liberalization and capital account openness on real consumption growth variability we show that financial liberalization is mostly associated with lower consumption growth volatility our results are robust surviving controls for business cycle effects economic and financial development the quality of institutions and other variables countries that have more open capital accounts experience a greater reduction in consumption growth volatility after equity market openings we also find that financial liberalizations are associated with declines in the ratio of consumption growth volatility to gdp growth volatility suggesting improved risk sharing our results are weaker for liberalizing emerging markets but we never observe a significant increase in real volatility moreover we demonstrate significant differences in the volatility response depending on the size of the banking and government sectors and certain institutional factors