Financial liberalization and consumption smoothing : bridging theory and empirics
Thesis (Ph.D.)--Georgetown University, 2009.; Includes bibliographical references. Does financial liberalization increase consumption risk sharing? Yes. This thesis develops a well-defined empirical framework and provides empirical evidence that more financial liberalization improves consumption smoothing, although the relationship is nonlinear and the extent of consumption risk sharing depends on the actual level of impediments to trade in foreign capital. On the other hand, increased cross-country productivity correlations provide fewer incentives for risk sharing and may deteriorate consumption smoothing.; The benefits of sharing risks can go beyond having a smooth consumption. This thesis builds a model of global portfolio diversification which links financial liberalization and industrial specialization. This is an important contribution since standard models of international macro lack mechanisms linking financial openness and industrial specialization. As financial liberalization creates more risk sharing opportunities, agents in an economy are able to shift risks. This insurance permits them to engage in risky activities that they would not otherwise undertake, and will benefit from higher growth opportunities. In return, output volatility will increase and cross-country output correlations will decline. The model also shows that consumption smoothing and portfolio home bias can be affected by both cross-country and cross-sector productivity shock correlations.
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