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Consumption risk sharing and adjustment costs

Fanelli, Luca and Cavaliere, Giuseppe and Gardini, Attilio (2004): Consumption risk sharing and adjustment costs.

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Abstract

We show that full risk sharing may not be at odd with the idea that changes in regional consumption display error-correcting dynamics, in line with the idea that information and transaction costs stemming from interregional portfolio diversification and labor movements induced by permanent income shocks may delay the adjustment process. Using Italian data over the period 1960-2001 it is found that regional per capita consumptions match the proposed error-correcting structure.

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