An earlier version of this paper was circulated as The Home Bias and Capital Income Flows between Countries and Regions. We thank the editor, Benn Steil, and two anonymous referees for useful suggestions.
The Home Bias, Capital Income Flows and Improved Long-Term Consumption Risk Sharing between Industrialized Countries†
Article first published online: 23 FEB 2012
© 2012 Blackwell Publishing Ltd.
Volume 14, Issue 3, pages 481–505, Winter 2011
How to Cite
Artis, M. J. and Hoffmann, M. (2011), The Home Bias, Capital Income Flows and Improved Long-Term Consumption Risk Sharing between Industrialized Countries. International Finance, 14: 481–505. doi: 10.1111/j.1468-2362.2011.01293.x
- Issue published online: 23 FEB 2012
- Article first published online: 23 FEB 2012
Is financial globalization associated with improved international consumption risk sharing? We focus on the long-term (that is low frequency) co-movement of consumption and output in answering this question. Theoretically, the impact of financial globalization should show up first and most robustly in the lower frequencies of the data. We show that this is the case empirically: by the end of our sample period (1960–2007), up to 40% of long-term idiosyncratic consumption risk is shared between industrialized countries – as compared to less than 10% before 1990. This dramatic increase is associated with a huge increase in international capital income flows: while capital income flows remain relatively limited as a channel of risk sharing at business-cycle horizons, their contribution to international risk sharing at longer horizons has increased substantially. Much of this increase can be attributed to the growth in international asset positions over the recent globalization period.