We investigate whether there is time variation in the degree of international risk sharing by consumers in industrial, emerging and developing economies over the period 1960-2011. We propose a new measure of time-varying international consumption risk sharing that takes into account not only the potentially time-varying transmission of insurable income risk into consumption but also potential time variation in insurable income risk itself. Our empirical framework is cast into a state space system with unobserved risk components, time-varying parameters and stochastic volatilities. It is estimated using Gibbs sampling with Bayesian model selection applied to the time-varying components. When compared to the conventional risk sharing measure, our alternative risk sharing measure estimated for industrial countries is on average higher and shows both an earlier (i.e., from the 1980s onward) and a steeper increase in risk sharing. For emerging and developing economies time variation in the conventional risk sharing measure is imprecisely estimated while our alternative risk sharing measure suggests that risk sharing has increased (i.e., from the 1990s onward), in particular in emerging economies.

Coauthor: G. Everaert