The econometrics of consumption risk sharing: a new perspective

Abstract

In this paper it is proposed a new time series-based approach for testing consumption risk sharing among a set of counties or regions where both the long run and short run dynamic implications of the theory are simultaneously investigated within a Vector Equilibrium Correction (VEqC) model. This allows to measure whether countries or regions insure the non-aggregate uncertainty in their resources not only with respect to transitory shocks but also with respect to permanent ones . It is suggested that conventional risk sharing test have to be properly redefined to account for the possibility of error correcting dynamics and to avoid the possibility of "endogenous regressor bias" phenomena.