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

making renewable energy competitive in india reducing financing costs via a government sponsored hedging facility abstract in india a significant barrier to market competitiveness of renewable energy is a shortage of attractive debt domestic debt has high cost short tenors and variable interest rates adding 30 to the cost of renewable energy compared to renewable energy projects elsewhere foreign debt is as expensive as domestic debt because it requires costly market based currency hedging solutions we investigate a government sponsored foreign exchange facility as an alternative to reducing hedging costs using the geometric brownian motion gbm 2 as a representative stochastic model of the inr usd foreign exchange rate we find that the expected cost of providing a currency hedge via this facility is 3 5 percentage points 50 lower than market this leads to an up to 9 reduction in the per unit cost of renewable energy however this requires the government to manage the risks related to unexpected currency movements appropriately one option to manage these risks is via a capital buffer for the facility to obtain india s sovereign rating the capital buffer would need to be almost 30 of the underlying loan our findings have significant policy implications given that the indian government can use this facility to make renewable energy more competitive and therefore hasten its deployment

financing renewable energy infrastructure formulation pricing and impact of a carbon revenue bond abstract renewable energy systems depend on large financial incentives to compete with conventional generation methods market based incentives including state level rec markets and international carbon markets have been proposed as solutions to increase renewable energy investment in this paper we introduce and formulate a carbon revenue bond a financing tool to complement environmental credit markets to encourage renewable energy investment to illustrate its use we value the bond by predicting future revenue using stochastic processes after analyzing historical price data three illustrative examples are presented for renewable energy development in three different markets europe australia and new jersey our findings reveal that the sale of a carbon revenue bond with a ten year maturity can finance a significant portion of a project s initial cost

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

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

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

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

wage posting in two sided search and the minimum wage this article focuses on wage formation in an equilibrium two sided model of search with match specific heterogeneity despite a large number a continuum of employers search provides sufficient isolation to generate market power by posting wages employers without collusion capture most of the surplus that accrues to any match the equilibrium wage is below that which maximizes employment an example using calibrated parameter values is used to reconcile some recent otherwise contradictory empirical results on the employment effects of minimum wage adjustments

how does the sensitivity of consumption to income vary over time international evidence this paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen in standard theory greater financial integration facilitates international borrowing and lending helping to reduce the sensitivity of consumption growth to fluctuations in income the paper examines the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960 2011 two main results are reported first the sensitivity of consumption to income has declined over time as the degree of financial integration has risen the decline has been more pronounced in advanced economies than in developing ones second the regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income this finding is robust to the use of a wide range of empirical specifications country specific characteristics and other controls such as interest rates and outcome based measures of financial integration the paper also discusses other potential sources of the temporal changes in the sensitivity of consumption to income

foreign portfolio diversification and risk sharing we investigate income smoothing associated with international portfolio diversification by decomposing the net factor income nfi channel into interests dividends and retained earnings for oecd and eu countries we find that interest receipts and equity dividend payments contribute significantly to absorb domestic income shocks geographically concentrated portfolios and in particular biases toward eu markets have a strong negative effect on the degree of risk sharing

channels of interstate risk sharing united states 1963 1990 we develop a framework for quantifying the amount of risk sharing among states in the united states and construct data that allow us to decompose the cross sectional variance in gross state product into several components which we refer to as levels of smoothing we find that 39 percent of shocks to gross state product are smoothed by capital markets 13 percent are smoothed by the federal government and 23 percent are smoothed by credit markets the remaining 25 percent are not smoothed we also decompose the federal government smoothing into subcategories taxes transfers and grants to states

dynamics and heterogeneity of inter and intranational risk sharing this study extends the empirical model of incomplete risk sharing developed by crucini 1999 by allowing unequal income pooling and explores the implications of using an alternative measure for aggregate risk based on samples from canadian provinces g 7 and oecd countries spanning the years 1961 2008 we show that the empirical procedure used by crucini tends to overstate the average degree of risk sharing and understate the dispersion of risk sharing when compared to our unequal income pooling model the empirical results from our unequal pooling model show that i the degree and dispersion of risk sharing across canadian provinces g 7 countries and oecd countries remain stable over time ii the degree of risk sharing across canadian provinces is higher than that across the g 7 and oecd countries and iii the degree of risk sharing seems positively related to equity and trade diversification

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

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

renewable deployment in india financing costs and implications for policy india s ambitious goals for renewable energy raise many questions regarding the nature of investment required we conduct financial modeling of actual renewable projects in india and derive the following insights first the high cost of debt is the most pressing problem higher cost and inferior terms of debt in india may raise the cost of renewable energy by 24 32 compared to the u s second even if cost of debt goes down loan terms including short tenors and variable interest rates will become significant impediments given that they add 13 14 to the cost of renewable energy in india compared to the u s finally due to the high cost of debt policy lessons from the u s and europe which focus on finer instruments such as duration of revenue support revenue certainty investor risk perception and completion cost certainty are not likely to be as effective with potential impacts on the cost of renewable energy in the 3 11 range in fact we find that an interest rate subsidy which reduces the cost of debt reduces the overall subsidy burden by 13 16 this suggests that indian policymakers need to prioritize the provision of low cost long term debt and take a closer look at the successful efforts by china and brazil 2013 elsevier ltd

global business cycles convergence or decoupling we analyze the evolution of the degree of global cyclical interdependence over the period 1960 2008 using a dynamic factor model we decompose macroeconomic fluctuations in output consumption and investment into a global factor factors specific to country groups and country specific factors we find that during 1985 2008 there is some convergence of business cycle fluctuations among industrial economies and among emerging market economies surprisingly there is a concomitant decline in the relative importance of the global factor we conclude that there is evidence of business cycle convergence within each of these two groups of countries but divergence or decoupling between them

labour market rigidities and international risk sharing across oecd countries abstract in this paper we examine the role of labour market rigidities in the context of international consumption risk sharing stronger labour market regulation may make it easier to borrow against future income thus allowing shocks to be smoothed to a greater extent in addition rigid labour markets may help to enforce implicit contracts that shift risk from employees to owners of firms who in turn may diversify risk internationally using data for 19 oecd countries we show that labour market rigidities significantly increase consumption correlations and reduce the exposure to country specific shocks these results suggest that labour market rigidities improve the international sharing of consumption risks by fostering a more efficient intra national allocation of risk

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

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

ex ante implications of sovereign default i study how the possibility of default on external debts affects other capital allocation decisions in a small open economy in the model default has an option value derived from the randomization over ex post default regimes which depends on country specific productivity shocks this feature of default reduces incentives for ex ante diversification which would reduce exposure to the productivity shock as a result if the economys debt to capital ratio is allowed to cross a fixed threshold identified in the model the unique equilibrium exhibits an allocation of capital that is less productive in expectation and more volatile than in a benchmark model without default the model therefore captures a number of salient features of emerging and less developed countries where low levels of international risk sharing have gone hand in hand with frequent and recurring default events

financial education investor protection and international portfolio diversification abstract this paper investigates the effect of financial education on foreign portfolio investment we show that higher investor financial education fosters international diversification and that its role is particularly pronounced where information problems and monitoring costs are likely to be more severe that is in countries where protection of minority shareholders rights is weaker we interpret this evidence as supportive of the conjecture that financial education lessens the informational constraints binding foreign investors

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

the effect of emergency liquidity assistance ela on bank lending during the euro area crisis abstract we examine the impact of emergency liquidity assistance ela on bank lending in eleven euro area countries during the financial crisis with the intensification of the crisis ela took on a pivotal role in some countries however assessments of the quantitative impact of ela in the literature are non existent we estimate a structural panel model for the determination of bank lending which includes the amount of ela received by each bank allowing us to investigate the direct effect of ela on lending our model corrects a mis specification found in the prototype model used in the literature we then undertake a var analysis which allows us to address the effect of ela on gdp finally we examine spillover effects among banks indicating that ela generated positive spillovers to other banks

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

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

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

excess comovement in international equity markets evidence from cross border mergers we examine the changes in betas from international mergers we find that the beta with respect to the acquirer s home market rises and that with respect to the target s home market falls the effect is large and robust with respect to controls for changes in the operations of the companies involved such an effect can occur only if international equity markets are not integrated we also find that the effect has not reduced over time that cross listings do not generally have a significant effect on international betas and that the u s and u k are more integrated internationally than other markets

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

risk sharing through capital gains we estimate channels of international risk sharing between european monetary union emu european union and other oecd countries 1992 2007 we focus on risk sharing through savings factor income flows and capital gains risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then risk sharing from capital gains at about 6 is higher than risk sharing from factor income flows for european union countries and oecd countries risk sharing from factor income flows is higher for euro zone countries at 14 reflecting increased international asset and liability holdings in the euro area on examine les canaux de partage international du risque entre l union monetaire europeenne l union europeenne et les autres pays de l ocde 1992 2007 on se concentre sur le partage du risque via les epargnes les flux de revenus des facteurs et les gains de capitaux le partage du risque via les revenus des facteurs et les gains de capitaux a ete presque nul avant 1999 mais s est accru depuis le partage du risque via les gains de capitaux a peu pres 6 est plus grand que le partage du risque via les flux de revenus des facteurs pour les pays de l union europeenne et les pays de l ocde le partage du risque vis les flux de revenus des facteurs est plus eleve pour l euro zone a quelques 14 refletant le fait que les actifs et passifs internationaux detenus dans la zone euro se sont accrus

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

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

securitization of mortgage debt domestic lending and international risk sharing securitization makes mortgage related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk in the years 2003 2008 the increase in international cross holdings of securitized mortgage debt has lowered industrialized countries conditional consumption volatility relative to the united states by about 10 15 percentage points we turn to the role of domestic credit in explaining this result domestic credit leads to better international risk sharing only if debt is securitized and traded internationally conversely the risk sharing benefits from securitization seem to evaporate if credit dries up as it did in the recent financial crisis la titrisation fait que les risques attaches aux hypotheques peuvent etre transiges internationalement voila qui contribue de maniere significative a la diversification internationale des risques macroeconomiques dans les annees 2003 2008 l accroissement dans la dette hypothecaire titrisee detenue dans d autres pays a reduit la volatilite de la consommation relative par rapport aux etats unis des pays industrialises de 10 15 points de pourcentage on examine le role du credit domestique dans l explication de ce resultat on montre que le credit domestique entraine un meilleur partage international du risque seulement si la dette est titrisee et negociee internationalement a contrario les avantages de la titrisation semblent s evaporer si le credit s asseche comme ce fut le cas dans la recente crise financiere

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

consumption risk sharing over the business cycle the role of small firms access to credit markets abstract consumption risk sharing among u s states increases in booms and decreases in recessions these business cycle fluctuations in interstate risk sharing are driven mainly by states in which small businesses account for a large share of income or employment state level banking deregulation during the 1980s loosened the dependence of interstate risk sharing on the business cycle mainly through its impact on states with many small firms our results establish a major benefit from bank deregulation small firms access to credit and with it interstate risk sharing have improved mainly when it is most urgently needed in nationwide economic downturns

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

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

the impact of international portfolio composition on consumption risk sharing abstract recent empirical work has shown that ongoing international financial integration facilitates cross country consumption risk sharing these studies typically find that countries with high equity home bias exhibit relatively low international consumption risk sharing we extend this line of research and demonstrate that it is not only a country s equity home bias that prevents consumption risk sharing in addition the composition of a country s foreign asset portfolio plays an important role using panel data regression for a group of oecd countries over the period 1980 2007 we show that foreign investment bias has additional explanatory power for consumption risk sharing

does financial globalization promote risk sharing article i nfo in theory one of the main benefits of financial globalization is that it should allow for more efficient international risk sharing in this paper we provide an empirical evaluation of the patterns of risk sharing among different groups of countries and examine how international financial integration has affected the evolution of these patterns using a variety of empirical techniques we conclude that there is at best a modest degree of international risk sharing and certainly nowhere near the levels predicted by theory in addition only industrial countries have attained better risk sharing outcomes during the recent period of globalization developing countries have by and large been shut out of this benefit even emerging market economies many of which have reduced capital controls and all of which have witnessed large increases in cross border capital flows have seen little change in their ability to share risk we find that the composition of flows may help explain why emerging markets have not been able to realize this presumed benefi to f financial globalization in particular our results suggest that portfolio debt which had dominated the external liability stocks of most emerging markets until recently is not conducive to risk sharing