Financial-integration thresholds for consumption risk-sharing

Abstract I present empirical evidence of how international consumption risk sharing varies by levels of financial integration. In a panel data set of 64 countries from 1985–2009, I show a significant presence of threshold effects of financial integration on international consumption risk sharing. The results indicate the presence of two significant thresholds and three corresponding regimes. Below the lower threshold is limited but statistically significant consumption risk-sharing. Above the higher threshold is significant risk-sharing. However, intermediate to the two thresholds is a regime with excess volatility. These findings are therefore suggestive of a U-shaped relationship between financial integration and consumption risk-sharing, with a potentially destabilizing intermediate regime.