Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1261: Determinants of International Consumption Risk Sharing in Developing Countries

Malin Gardberg ()
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Malin Gardberg: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Abstract: 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 120 countries from 1970 to 2014. Contrary to some previous studies, I show that financial liberalization and financial integration has a significantly positive impact on international consumption risk sharing in poorer developing countries, whereas in emerging market countries only capital account openness has an impact. Moreover, there is some evidence that high income inequality or a high share of low income individuals reduces consumption smoothing in less developed countries. Lack of financial reforms, 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.

Keywords: International consumption risk sharing; Financial liberalization; Financial integration; Inequality; Panel data

JEL-codes: C23; E02; E21; E44; F38; F62; G15

55 pages, January 31, 2019

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