TY  - JOUR
AU  - Fuhrer,Jeffrey C.
AU  - Klein,Michael W.
TI  - Risky Habits:  On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6735
PY  - 1998
Y2  - September 1998
UR  - http://www.nber.org/papers/w6735
L1  - http://www.nber.org/papers/w6735.pdf
N1  - Author contact info:
Jeffrey Fuhrer
Research Department
Federal Reserve Bank of Boston
600 Atlantic Avenue
Boston, MA  02106
Tel: 617-973-3410
Fax: 617-973-3957
E-Mail: jeff.fuhrer@bos.frb.org

Michael W. Klein
Fletcher School
Tufts University
Medford, MA 02155
Tel: (617) 627-2718
Fax: (617) 627-3712
E-Mail: michael.klein@tufts.edu
AB  - Standard international economic models with life cycle/permanent income consumption behavior predict that international portfolio diversification leads to high bilateral consumption correlations. Thus international consumption correlations have been empirically estimated as a test of international portfolio diversification and risk sharing.  In this paper we investigate the international consumption correlations generated by a more general model which incorporates habit formation in consumption.  We show that, in the presence of common interest rate movements, habit formation itself can generate positive international consumption correlations even in the absence of any international risk sharing.  Empirical evidence presented in this paper suggests habit formation characterizes consumption behavior among most of the G-7 countries.  Thus, the extent of international portfolio diversification may be even lower than that suggested by previous research which studied international consumption correlations.
ER  -