Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/166726
Authors: 
Islamaj, Ergys
Kose, M. Ayhan
Year of Publication: 
2016
Series/Report no.: 
Koç University-TÜSİAD Economic Research Forum Working Paper Series 1602
Abstract: 
This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.
Subjects: 
Consumption Sensitivity
Financial Integration
Risk Sharing
Intertemporal Smoothing
JEL: 
E21
F02
F4
Document Type: 
Working Paper

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