On international risk sharing and financial globalization: some gloomy evidence

By means of panel and time series regression analyses, and by resorting to a variance decomposition due to Asdrubali et al. (1996) we show that income flows to and from abroad did not play, in general, a large risk sharing role for a pool of EU countries over the horizon 1976-2007. This is particularly true in a pre-globalization period, but remains true for some countries, even in the finance globalization era. We then extend the analysis to consider a measure of cash flow, instead of income, available for consumption, and observe that capital flows to and from abroad have played a largely destabilizing role, to an extent that one might have not expected beforehand. Key to this result is also the study of asymmetries in smoothing positive and negative shocks by the different possible channels. These findings seem to provide some useful insights onto the origin of the recent global financial crisisRisk Sharing, Financial Globalization, Capital Flows

International risk sharing and globalization

The main research question of this empirical work is whether or not globalization, in its various forms, has had an impact upon international risk sharing. The empirical literature so far has only investigated on one aspect of globalization: economic and financial integration. By decomposing globalization in its economic, political and social aspects, and using a standard framework of consumption insurance tests to gauge the extent of risk sharing among countries, we obtain some interesting results. One of the main findings is that economic and social integration help better cope with idiosyncratic risk, but also that without political integration this might result in an increasing exposure to systemic (uninsurable) risk.International risk sharing; globalization; social and political integration

International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey

By using data from all available waves of the IMF Coordinated Portfolio In- vestment Surveys, we explore the dynamics of the determinants of cross portfolio investments. The main aim of our analysis, however, is to understand whether a diversification motive can also be found, among the various determinants. We find strong evidence that, indeed, the correlation between the idiosyncratic components of gdp growth, as well as the correlation between stock returns between pair of coun- tries, that we consider as proxies for diversification, are relevant to explain bilateral portfolio holdings, when unobserved heterogeneity is properly taken into account, by means of a fixed effect, panel estimation (where the fixed effects refer to pair of countries, rather than countries in isolation). Interestingly, the same results, cannot be retrieved from cross section estimations. It also turns out that the diversification motive is less relevant, if at all, in choosing whether or not to invest in a particular area

Narrowing the US twin deficits: simulations with a world macroeconometric model

In this paper we extend the macroeconometric model developed in Bagnai (2004) by linking it to a submodel for the Japanese economy, and we utilize this extended model to investigate several hypotheses of reduction in the US twin deficits. The Japanese submodel is specified and estimated along the lines set out in Bagnai and Carlucci (2003), using the “cointegration with endogenous structural break” estimation method of Gregory and Hansen (1996). The estimation results show that the Japanese economy underwent a major structural change after the first oil-price shock. The “twin deficits” simulations consider two policy instruments: a US dollar exchange rate devaluation, and a fiscal consolidation, carried out through a decrease in US government consumption. We analyze both different sizes and different timing of these policy measures, as well as their interactions, in order to evaluate their effectiveness, and the costs they impose on the partner countries (in particular, on the Euro area and Japan).twin deficits, structural break, econometric model, Japan, EMU, USA

Risk sharing among economic sectors

We investigate risk sharing channels across different economic sectors to quantify to what extent they contribute offsetting idiosyncratic shocks. We examine the two most relevant channels of smoothing among OECD and EU countries: the international investment income and the savings channels. We find that the households' share in net foreign asset income has a significant role in risk sharing. This surprising result is strictly related to the accumulation of households' foreign asset holdings. On the contrary, governments' cross-border holdings produce a dis-smoothing effect and this might be imputable to the holding of EU countries' assets. This outcome is reversed for the new EU countries in the post Global Financial Crisis (GFC) period. With regard to the savings channel, we find that governments significantly contribute to risk sharing, and more significantly after the inception of the GFC. Moreover, the dividend smoothing theory reconciles with the risk-sharing findings since corporations (in particular non financial) significantly smooth shocks through their savings, however their contribution to risk sharing is weak in the post-GFC era

Risk sharing among economic sectors

We investigate risk sharing channels across different economic sectors to quantify to what extent they contribute offsetting idiosyncratic shocks. We examine the two most relevant channels of smoothing among OECD and EU countries: the international investment income and the savings channels. We find that the households' share in net foreign asset income has a significant role in risk sharing. This surprising result is strictly related to the accumulation of households' foreign asset holdings. On the contrary, governments' cross-border holdings produce a dis-smoothing effect and this might be imputable to the holding of EU countries' assets. This outcome is reversed for the new EU countries in the post Global Financial Crisis (GFC) period. With regard to the savings channel, we find that governments significantly contribute to risk sharing, and more significantly after the inception of the GFC. Moreover, the dividend smoothing theory reconciles with the risk-sharing findings since corporations (in particular non financial) significantly smooth shocks through their savings, however their contribution to risk sharing is weak in the post-GFC era

International risk sharing and globalization

The main research question of this empirical work is whether or not globalization, in its various forms, has had an impact upon international risk sharing. The empirical literature so far has only investigated on one aspect of globalization: economic and financial integration. By decomposing globalization in its economic, political and social aspects, and using a standard framework of consumption insurance tests to gauge the extent of risk sharing among countries, we obtain some interesting results. One of the main findings is that economic and social integration help better cope with idiosyncratic risk, but also that without political integration this might result in an increasing exposure to systemic (uninsurable) risk

International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey

By using data from all available waves of the IMF Coordinated Portfolio In- vestment Surveys, we explore the dynamics of the determinants of cross portfolio investments. The main aim of our analysis, however, is to understand whether a diversification motive can also be found, among the various determinants. We find strong evidence that, indeed, the correlation between the idiosyncratic components of gdp growth, as well as the correlation between stock returns between pair of coun- tries, that we consider as proxies for diversification, are relevant to explain bilateral portfolio holdings, when unobserved heterogeneity is properly taken into account, by means of a fixed effect, panel estimation (where the fixed effects refer to pair of countries, rather than countries in isolation). Interestingly, the same results, cannot be retrieved from cross section estimations. It also turns out that the diversification motive is less relevant, if at all, in choosing whether or not to invest in a particular area

Reassessing international investment patterns: a revisitation of Lane and Milesi-Ferretti's evidence.

We show that recent methodological advances in econometric theory raise questions about the results obtained by Lane and Milesi-Ferretti (LMF) in relation to the determinants of international investment patterns (International Investment Patterns, The Review of Economics and Statistics 2008; 90(3): 538{549). We find that LMF's estimated equations are affected by heteroscedasticity (which can lead to inconsistent estimates in log-linearized models), and that the results depend on the pattern of heteroscedasticity assumed and on the estimation method applied. Thus, LMF's findings need to be reassessed. Moreover, we extend the dataset over time to estimate the panel version of the LMF's equations (over years 2001{2009). Our panel allows for the proper accounting of unobserved heterogeneity through country-pair fixed effects and improves the cross-section analysis reconciling empirical evidence with economic theory. Irrespective of the estimation method, we identify a clear diversification motive which drives international equity purchases

The impact of social capital on consumption insurance and income volatility in U.K.: evidence from british household panel survey

On BHPS data we measure various indices of social capital at the individual and household level, and use them as explanatory variables in standard consumption insurance tests. We find that two out of three aspects of social capital positively impact on consumption smoothing, by reducing the sensitivity of idiosyncratic consumption to idiosyncratic income, both in the long and in the short run. Such effects, however, turn out to be more pronounced in the long run. Further confirmation of the positive impact of social capital on insurance opportunities are derived from an income smoothing exercise, as well as from a Poisson and a Logit analysis on the occurrence of unemployment spells