Financial-integration thresholds for consumption risk-sharing

- This paper empirically identifies and estimates financial integration thresholds for international consumption risk sharing.
- Results show existence of two significant thresholds (in terms of financial integration measures) and three regimes.
- Below the lowest threshold, there is economically small but statistically significant international consumption risk sharing.
- Above the highest threshold level, there is economically and statistically significant international consumption risk sharing.
- In between the two thresholds there is a destabilizing regime where no international consumption risk sharing is evident.
- Financial integration is associated with significant consumption risk-sharing but only after a destabilizing transitory phase.

I present empirical evidence of how international consumption risk sharing varies by levels of financial integration. In a panel data set of 64 countries from 1985-2009, I show a significant presence of threshold effects of financial integration on international consumption risk sharing. The results indicate the presence of two significant thresholds and three corresponding regimes. Below the lower threshold is limited but statistically significant consumption risk-sharing. Above the higher threshold is significant risk-sharing. However, intermediate to the two thresholds is a regime with excess volatility. These findings are therefore suggestive of a U-shaped relationship between financial integration and consumption risk-sharing, with a potentially destabilizing intermediate regime.