Financial Frictions and Asymmetric International Risk Sharing

This paper documents the role played by financial frictions in the asymmetry of international risk sharing during different phases of business cycles.

Highlights

• International risk sharing among OECD countries weakens during domestic recessions, when its role is most needed.
• The asymmetry in the risk sharing response to cyclical fluctuations is driven mainly by dis-smoothing effects in the capital market channel and the credit market channel. Specifically, interest payments to abroad and credit constraints of households increase during domestic recessions, limiting the smoothing role of risk sharing channels.
• However, countries with more internationally integrated financial markets and corporate disclosure can mitigate the dis-smoothing effects of these two channels and thus the asymmetry in international risk sharing.

Information and identifiers

Discussion Paper 205. July 2024. Brussels. PDF. 28pp. Tab. Graph. Bibliogr. Free.

KC-BD-23-022-EN-N (online) 
ISBN 978-92-68-01823-1 (online) 
ISSN 2443-8022 (online)
doi:10.2765/197551 (online)

JEL classification: E00; E21; F15; G15.

Disclaimer

European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission.