International risk sharing in emerging economies

Abstract

This study investigates the apparent lack of insurance against country-specific risk observed internationally. Using a sample of 21 emerging and 21 advanced economies over the period 1980–2014, I document new evidence from international co-movements of prices and quantities suggesting that risk sharing is worse in emerging economies than in advanced economies. I then extend a standard international business cycle model to assess the implications of the “cycle is the trend” hypothesis for international risk sharing. I show that shocks to trend productivity growth provide a compelling explanation for the distinct risk-sharing features of emerging market economies. The findings of this study are relevant for the conduct of stabilization policy, as it critically depends on the nature of the shocks that affect an economy.