This paper examines the extent of consumption risk sharing for a group of 50 high-income and developing countries. The analysis is based on the empirical implementation of a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the 0 hypothesis of perfect risk sharing is rejected. The estimation results show that high-income countries exhibit higher degrees of risk sharing than developing countries, and that the gap between the two country groups appears to have widened over the period of financial globalization. Moreover, the pattern of consumption risk sharing is related to the degree of financial openness: countries with more open capital accounts, and larger stocks of foreign assets and liabilities exhibit larger degrees of risk sharing. Yet, larger countries in terms of gross domestic product show lower degrees of consumption risk sharing.

This paper evaluates the degree of consumption insurance enjoyed by Latin American and Caribbean countries, with respect to various reference areas, by estimating a parameter expressing the sensitivity of a country's consumption growth to a measure of idiosyncratic shocks to income. The paper surveys common econometric implementations of "consumption insurance tests." The author proposes some econometric procedures in order to detect the actual presence of international risk sharing, as well as to assess the relative impact of idiosyncratic versus aggregate shocks. The evidence suggests that Latin American and Caribbean economies have been hit by non-diversifiable income shocks, that idiosyncratic risk is relatively more important than aggregate risk, and that some countries in the region appear to enjoy a certain amount of international risk diversification. The paper also identifies some macroeconomic factors that may be responsible for a higher or lower degree of risk pooling (such as international openness, financial depth, and credit availability). The findings show that the financial development of an economy is a crucial factor in determining the amount of risk sharing opportunities, as well as public expenditure. The preliminary results also suggest that trade openness and shocks to terms of trade play an important role in determining the degree of insurability of such risks.

The objective of the first chapter is to investigate the degree of consumption risk-sharing within Japan, and to evaluate various explanations for the level of intra-national risk-sharing that are not previously examined. I find the evidence of much larger degree of consumption risk sharing within Japan than that between countries. The model is extended to include the assumptions of (a) non-separability in the utility function between consumption and leisure, (b) the prefecture specific effects, and (c) the disaggregated consumption. Once the prefecture specific effects are controlled for, the income effect on consumption is further reduced. I next investigate the amount of risk sharing within various subgroups of Japanese prefectures. Interestingly, I find that the subgroup of rich or fast growing prefectures is the most vulnerable to the idiosyncratic income effects. Furthermore, when the analysis is applied to the subgroup of geographically close regions, the strong evidence for full consumption risk sharing is detected for some regions. The second chapter examines the determinants of FDI from U.S. and Japan in China using the provincial data set from 1991 to 1997. The results of the regression analyses are further compared to those of the aggregated FDI as a benchmark case. The study found various similarities and differences in the importance and the magnitudes of the determinants of FDI among three FDI sources. It is shown that both absolute level of GDP and the lagged GDP significantly affects inflow of FDI from all sources. The hypothesis that the good quality of infrastructure is conductive to attract FDI is strongly supported for all FDI sources, although the magnitude of the impact of the variable varies. The policy variables are also found to have significant positive effects on FDL The labor quality exerts larger influence on Japanese FDI than on U.S. FDI, which may reflect the different structure for coordinating activities between U.S. and Japanese firms. The results for the wage variables are inconclusive. The study also shows the marginal support for the positive effect of cultural proximity between Japanese FDI and the provinces of Manchuria.

International consumption risk sharing studies have largely ignored their models' counterfactual implications for asset returns although these returns incorporate direct market measures of risk. In this paper, we modify a canonical risk-sharing model to generate more plausible asset return behavior and then consider the effects on welfare gains. Matching the mean and variance of equity returns and the risk-free rate requires persistent consumption risk, leading to three main findings: (1) risk-sharing gains decrease as the ability to diversify persistent consumption risk decreases; (2) the international correlation of equity returns is high relative to the correlation of consumption and dividends, implying low diversification potential for persistent consumption risk; and (3) increasing persistent consumption risk reduces the gains. Taken together, our findings suggest that asset returns imply more international risk sharing than previously thought.

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states.We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons.

Though theory suggests financial globalization should improve international risk sharing, empirical support has been limited. We develop a simple welfare-based measure that captures how far countries are from the ideal of perfect risk sharing. We then take it to data and find international risk sharing has, indeed, improved during globalization. Improved risk sharing comes mostly from the convergence in rates of consumption growth among countries rather than from synchronization of consumption at the business cycle frequency. Our finding explains why many existing measures fail to detect improved risk sharing-they focus only on risk sharing at the business cycle frequency.