Borrowing constraints and international risk sharing: evidence from asymmetric error-correction

Leibrecht, M. and Scharler, J. (2011) Borrowing constraints and international risk sharing: evidence from asymmetric error-correction. Applied Economics, 43 (17). pp. 2177-2184. ISSN 1466-4283 doi: 10.1080/00036840903103692

Abstract/Summary

We analyse the adjustment process of consumption growth after disequilibrating output shocks in a sample of Organization for Economic Cooperation and Development (OECD) countries. In particular, we test the hypothesis that consumption is smoothed to a lesser degree after negative shocks, whereas the impact of a positive shock is delayed for a longer period of time. Our analysis is based on an error-correction framework that allows for asymmetric adjustment. We find that the mean adjustment lag after a negative shock is significantly shorter than after a positive shock, especially since the beginning of the 1980s. This result is consistent with the interpretation that borrowing constraints limit the degree to which the impact of negative shocks on consumption can be smoothed.