Abstract
AbstractIn this paper, we study the dynamics of international consumption risk sharing among the G‐7 countries. Based on the dynamic conditional correlation model due to Engle (2002), we construct a time‐varying, consumption‐based measure of risk sharing. We find that the exposure to country‐specific shocks has evolved heterogeneously across the G‐7 countries and that risk sharing varies procyclically with the output gap. This dependence on the business cycle is especially pronounced in countries where credit constraints are relatively binding.
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