Balance of Payments Statistics based on the Balance of Payments Manual 6 (BPM6). Foreign aid data are from the WDI and refers to net official development assistance and official aid (ODA). Net ODA definition excludes humanitarian aid, development food aid and debt relief grants. Financial flows data (de facto measures of financial integration) are drawn from the IMF’s Balance of Payments accounts and Lane and Milesi-Ferretti (2007) data sets.<sup>8</sup> The database also includes de-jure measures of financial integration and trade openness. For de-jure financial integration, we use Chinn and Ito’s (2006) measure, which offers the most comprehensive coverage of countries and period. Trade openness is defined as exports plus imports to GDP and series are drawn from the WDI. Following earlier work, we drop countries with population less than one million. We also drop countries for which fewer than 10 observations of remittance inflows are available. In the end, for our baseline results we utilize a sample of 79 EMDEs over the 1990-2018 period.<sup>9</sup>

# 2.2. Empirical Methodology

We follow standard literature that has tested various implications of the consumption Euler equation to estimate the extent of international risk sharing in aggregate data (Obstfeld, 1994; Lewis, 1996; Kose, Prasad and Terrones, 2009). These studies employ a simple framework that is based on the predictions of the standard complete markets model and regress country-specific consumption growth on country-specific output growth: j j where ∆ct+1 (∆yt+1) denotes country j consumption (output) per capita growth at time t+ 1; j ∆ct+1 (∆yt+1) denotes world consumption (output) growth at time t+ 1; εt+1 follows a stationary process and represents measurement error; and where β measures the extent of risk sharing. Theoretically, in a model with complete international financial markets and perfect risk sharing, the coefficient β, which captures the degree of countries’ uninsured idiosyncratic consumption risk, is equal to zero. In practice, earlier studies interpret β pragmatically and argue that this coefficient can be used to measure the degree of risk sharing. The smaller the extent of idiosyncratic comovement between country-specific consumption and output growth the smaller β, and the greater the degree of international risk sharing (Asdrubali, Sørensen and Yosha 1996).<sup>10</sup>

> 8 The data set by Lane and Milesi-Ferretti (2007) on financial assets and liabilities ends in 2011. This data set is constructed using information from the IMF Balance of Payments as well as other sources. As a result, it offers a better coverage for developing economies in the earlier years of our sample compared to the IMF Balance of Payments. We use growth rates of each variable in Lane and Milesi-Ferretti’s (2007) data set to extend the IMF Balance of Payments data backwards.

> 9 The Appendix presents the list of countries. For comparison and further robustness, we also pool this country group with advanced economies. In that case, the sample includes 110 countries. On average, total remittances have been less than 0.2 percent of GDP in advanced economies, so we do not include them in the baseline. In the case of aid flows, WDI reports data for less than one-third of the advanced economies and only for the 1990-2004 period, so they are not included in the baseline. Aid flows to advanced economies averaged about 0.6 percent of GDP during the 1990-2004 period.

> 10 The extent of risk sharing can be calculated as (1 −β) (Artis and Hoffmann 2012; Sørensen et al. 2007). If β= 1, then there is no risk sharing. If β= 0, then the country has achieved full risk sharing. The growth rates of aggregate

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