NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Industrial-Country Consumption Risks Globally Diversified?

Maurice Obstfeld

NBER Working Paper No. 4308 (Also Reprint No. r1917)
Issued in November 1994
NBER Program(s):   IFM

What idiosyncratic consumption risks can countries trade away on international asset markets? This paper develops an empirical methodology for answering the question. The tests are based on the proposition that in an integrated world asset market with representative national agents, the ex post difference between two countries' intertemporal marginal rates of substitution in consumption is uncorrelated with any random variable on which contractual payoffs can be conditioned. This result is applied to annual time-series data for the seven largest industrial countries over 1950-88. Of these countries, Germany seems to have been most successful at internationally diversifying its consumption risks.

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Document Object Identifier (DOI): 10.3386/w4308

forthcoming in Leonardo Leiderman and Assaf Razin, eds., Capital Mobility Cambridge, UK, Cambridge University Press, 1994

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