Title: Risk-sharing channels in OECD countries: A heterogeneous panel var approach
Authors: Pierfederico Asdrubali - European Commission (Luxembourg)
Soyoung Kim - Seoul National University (Korea, South)
Filippo Pericoli - European Commission- Joint Research Centre (Italy)
Pilar Poncela - Universidad Autonoma de Madrid (Spain) [presenting]
Abstract: The aim is to improve upon the existing empirical literature on international risk sharing under three dimensions. First, we generalize dynamic multi-equation approaches to the estimation of risk-sharing channels, by adopting a Heterogeneous Panel VAR model. Within this framework, the coefficients representing the extent of risk sharing achieved through the different mechanisms are allowed to vary across countries. Second, we introduce two new risk-sharing channels, namely, government consumption and the real exchange rate, which allow us to investigate the role of fiscal policy and international price adjustments in the absorption of macroeconomic shocks. Third, we establish a better link between the channels empirical model and a theoretical formulation of the risk-sharing condition, which allows for PPP violations. The empirical analysis, for a set of 21 OECD countries over the 1960-2016 period, contributes to identifying the geographical structure and dynamics of risk-sharing channels and to describing their evolution in the latest half-century. For the OECD sample as a whole, we confirm through 2016 the strong smoothing role played by credit markets and the small degree of risk-sharing achieved through factor incomes. Another noteworthy result is the negative risk-sharing effect of the real exchange rate, driven by the dis-smoothing role played by the movements of the nominal exchange rate, only partially offset by relative price adjustments.