Risk Sharing among OECD and EU Countries: The Role of Capital Gains, Capital Income, Transfers, and Saving

Balli, Faruk and Sorensen, Bent E. (2007): Risk Sharing among OECD and EU Countries: The Role of Capital Gains, Capital Income, Transfers, and Saving.

Abstract

We estimate the amount of income and consumption smoothing (risk sharing) between OECD countries during the period 1970{2003 with a particular focus on EU and EMU countries. Income smoothing from international factor income has increased in the EU and, in particular, the EMU but not in the non-EU OECD since the introduction of the Euro. Consumption smoothing from pro-cyclical government saving has declined in the EMU, but not in the non-EU OECD, since the signing of the Maastricht treaty. We find that when capital gains and losses on international asset positions are considered part of income, the magnitude of capital gains leads to huge amounts of income smoothing and dis-smoothing although, at the time horizons we examine, the capital gains or losses are only weakly reflected in consumption. Understanding the role of capital gains in risk sharing appears to be of first order importance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government De¯cits, Income Insurance, International Capital Markets, International Integration, Risk Sharing, External Capital Gains
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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