Institutions meant to reallocate risks that cannot be fully diversified on financial markets, such as labour income fluctuations, may also affect the response of aggregate consumption to country-specific income shocks. This paper empirically assesses this possibility by extending a standard cross-country consumption insurance test to account for the interaction between macroeconomic shocks and labour and credit market institutions. In a panel of 15 OECD countries observed over the 1971-2003 period, institutional heterogeneity is a significant determinant of cross-country differences in consumption responsiveness to income changes. The estimates are remarkably robust to the inclusion of unobservable country-level heterogeneity and time-varying institutional indicators.
International Consumption Insurance and Within-Country Risk Reallocation
LO PRETE, Anna
2008-01-01
Abstract
Institutions meant to reallocate risks that cannot be fully diversified on financial markets, such as labour income fluctuations, may also affect the response of aggregate consumption to country-specific income shocks. This paper empirically assesses this possibility by extending a standard cross-country consumption insurance test to account for the interaction between macroeconomic shocks and labour and credit market institutions. In a panel of 15 OECD countries observed over the 1971-2003 period, institutional heterogeneity is a significant determinant of cross-country differences in consumption responsiveness to income changes. The estimates are remarkably robust to the inclusion of unobservable country-level heterogeneity and time-varying institutional indicators.
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