International consumption risk sharing

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Abstract
This paper formally examines the implications of international consumption risk sharing for a panel of industrialized countries. We theoretically derive the international consumption insurance proposition in a simple setup and show how it should be modified in more complicated models. We empirically analyze the implications of the theory for pairs of countries across frequencies of the spectrum and find that aggregate domestic consumption is almost completely insured against idiosyncratic real, demographic, fiscal and monetary shocks over short cycles, but that it covaries with these variables over medium and long cycles. The cross equation restrictions imposed by the theory are, in general, rejected. The policy implications of the results are discussed.
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