Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments

Abstract

We document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from outflows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income outflows (18 percent for the EMU and 16 percent for the EU). Factor income outflows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income outflows provide insurance against negative output shocks.In terms of the determinants of income smoothing, results indicate that an increase in foreign equity and debt liabilities positively affect the extent of smoothing via factor income outflows. Whereas, contrary to the current literature, an increase in foreign assets holding does not have a positive impact on smoothing via factor income inflows. The tendency of European investors' in allocating a sizeable portion of their assets within the Euro zone is shown to undermine income smoothing.JEL Codes: F36.

International income risk-sharing and the global financial crisis of 2008–2009

“…The sample is divided into several country groups: EMU, EU, new EU and OECD countries -see Table 1 for the complete country list. Our country selection and data coverage are comparable to those of Sørensen et al (2007), Demyanyk et al (2008) and Balli et al (2011). Per capita figures are obtained by normalizing over the population of each country.…”

“…They notice that the effect of diversification on risk-sharing is roughly similar for foreign assets and liabilities. Balli et al (2011), on the contrary, find that increased holdings of foreign assets caused income dis-smoothing during [2001][2002][2003][2004][2005][2006][2007], the years surrounding the introduction of the Euro. They interpret their result as a consequence of increased business cycle synchronization across EMU and EU countries.…”

“…Following Balli et al (2011), we decompose income smoothing via the NFI channel into factor income inflows and factor income outflows using following regression specification…”

Risk Sharing Across Economic Sectors

“…Therefore, risk-sharing channels have been quantified in a number of works. Sørensen and Yosha (1998) found that the bulk of consumption risk sharing is provided by procyclical saving channels, and recent studies (Sørensen et al, 2007;Balli et al, 2011Balli et al, , 2013Balli et al, , 2014Balli and Rana, 2015) have documented the importance of the net factor income channel (net asset revenues) on the extent of the risk sharing.…”

Decomposing the Income Insurance Channel across OECD and Emerging Markets

“…Balli et al (2010b) andBalli et al (2011) also followedSørensen et al (2007) and found that the extent of income smoothing through net factor income flows and the amount of the foreign asset holdings do not have a strong relationship.…”