Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations / Jeffrey C. Fuhrer, Michael W. Klein.

Format:

Book

Author/Creator:

Fuhrer, Jeff.

Contributor:

National Bureau of Economic Research.

Klein, Michael W.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6735.

NBER working paper series no. w6735

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Risky Habits

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

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.

Notes:

Print version record

September 1998.