International Consumption Risk Sharing

Abstract

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.