Is financial globalization associated with improved international consumption
risk sharing? We focus on the long-term (i.e. low frequency) comovement
of consumption and output in answering this question. Theoretically,
the impact of financial globalization should show up first and most robustly
in the lower frequencies of the data. We show that this is the case
empirically: by the end of our sample period (1960-2007) up to 40 percent
of long-term idiosyncratic consumption risk get shared between industrialized
countries – as compared to less than 10 percent before 1990. This
dramatic increase is associated with a huge increase in international capital
income flows: while capital income flows remain relatively limited as
a channel of risk sharing at business cycle horizons, their contribution to
international risk sharing at longer horizons has increased substantially.
Much of this increase can be attributed to the growth in international asset
positions over the recent globalization period.