Rotterdam Brown Bag Seminars General Economics

Malin Gardberg (Erasmus University Rotterdam)
Wednesday, June 8, 2016

Complete financial markets allow countries to share their consumption risks internationally, thereby creating welfare gains through lower volatility of aggregate consumption. This paper empirically looks at international consumption risk sharing and its determinants in a panel of 123 countries from 1970 to 2011. Contrary to some previous studies, I show that financial integration, measured either as an index of financial reform, capital account openness or as total external liabilities to GDP, has a significantly positive impact on international consumption risk sharing in developing countries. This result applies especially to poorer developing countries. Emerging market countries however seem to have gained less from financial integration in terms of consumption risk sharing. Remittance flows from migrant workers’ positively affect risk sharing in developing countries, whereas foreign aid does not have a significant impact. Moreover, there is some evidence that high income inequality and also a high share of low income individuals reduces consumption smoothing in less developed countries. A lower degree of financial integration and higher inequality can thus partly explain why the degree of risk sharing is lower in developing countries than in advanced economies.