Assessing the degree of international consumption risk sharing

Abstract

This paper examines the extent of risk sharing for a group of 50 industrial and developing countries. The analysis is based on a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the null hypothesis of perfect risk sharing is rejected. Results show that rich countries exhibit higher degrees of risk sharing than developing countries, and that the gap has widened over time. Other things equal, the degree of risk sharing is higher in smaller, more financially-open economies and in those possessing flexible exchange rate regimes.