We investigate international consumption risk sharing in a panel of 15 industrial economies over the historical period 1875–2016. By considering a rich empirical consumption-income framework, we document time variation in the sensitivity of consumption growth to idiosyncratic and common shocks but even more so in the size of these shocks. We therefore suggest to measure risk sharing through the use of encompassing variance ratios that take into account all sources of time variation, rather than using the conventional measure that only considers the sensitivity of consumption to idiosyncratic income growth. Using these more encompassing measures, we estimate degrees of international risk sharing that lie above those typically reported the literature and find a closer connection with the trends in trade and financial globalization.
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We thank the co-editor and two referees for their constructive comments and suggestions. We further thank Massimo Giuliodori and Felix Ward for useful comments on previous versions on the paper.
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