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Incomplete Intertemporal Consumption Smoothing and Incomplete Risk Sharing

Authors


  • We thank Kwanho Shin, Bent Sørensen, Sung In Jun, Dae Kun Park, Seung Kwan Baik, Yunjong Wang, Wooheon Rhee, and other seminar participants at the Econometric Society World Congress, the Korea Money and Finance Association Conference, the International Finance Studying Group, and the Macroeconomics Study Group in Seoul. We also wish to thank Giovanni Marini for econometric help, Mary Merva for reviewing the manuscript, and an anonymous referee for very useful suggestions. This research was supported by the research fund (R0600842) of Seoul Development Institute.

Abstract

This paper develops a method to estimate jointly the degree of intertemporal consumption smoothing and the degree of “inter-regional” risk sharing. The empirical results for the U.S. states and OECD and EU countries suggest that: (i) regardless of the assumption on the degree of intertemporal consumption smoothing, the degree of risk sharing within a country is larger than across countries; (ii) the degree of intertemporal consumption smoothing within a country is also larger than across countries; and (iii) the difference between the degree of intertemporal consumption smoothing within U.S. states and across OECD and EU countries is as large as the difference between the degree of risk sharing, contrary to the findings of some past studies.

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