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Financial Globalization, International Business Cycles, and Consumption Risk Sharing


Artis, Michael J; Hoffmann, Mathias (2007). Financial Globalization, International Business Cycles, and Consumption Risk Sharing. Working paper series / Institute for Empirical Research in Economics No. 346, University of Zurich.

Abstract

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have beennunable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growthnin most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower thenvolatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumptionncorrelations have also generally not increased as financial markets have become more integrated.

Abstract

In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have beennunable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growthnin most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower thenvolatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumptionncorrelations have also generally not increased as financial markets have become more integrated.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:December 2007
Deposited On:29 Nov 2011 22:47
Last Modified:07 Dec 2017 10:15
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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