Has Consumption Risk Sharing Increased in Asia (and Elsewhere)

Abstract

What impact has financial globalization had on risk sharing? In theory, financial globalization should improve international consumption risk sharing. While the answer to this question is of utmost policymaking concern, results in the empirical literature are inconclusive. The paper surveys the extant literature and tries to identify which factors influence the answer: i) consumption risk sharing seems to have increased among industrialized countries but much less in the emerging world. ii) The increase in risk sharing is generally found to be stronger in studies that focus on the trends rather than purely cyclical variation in the data. iii) globalization has not only affected consumption responses to output shocks but also the structure of these shocks themselves. This, in turn, has affected the measurement of risk sharing. The paper examines the relevance of these points on a sample of East Asian Economies. My results indicate that risk sharing in East Asia has started to increase once the region had recovered from the Asian crisis.