How Does the Sensitivity of Consumption to Income Vary Over Time? : International Evidence
This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to re...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/05/26330512/sensitivity-consumption-income-vary-over-time-international-evidence http://hdl.handle.net/10986/24234 |
| Summary: | This paper studies how the sensitivity
of consumption to income has changed over time as the degree
of financial integration has risen. In standard theory,
greater financial integration facilitates international
borrowing and lending, helping to reduce the sensitivity of
consumption growth to fluctuations in income. The paper
examines the empirical validity of this prediction using an
array of indicators of financial integration for a large
sample of advanced and developing countries over the period
1960-2011. Two main results are reported. First, the
sensitivity of consumption to income has declined over time
as the degree of financial integration has risen. The
decline has been more pronounced in advanced economies than
in developing ones. Second, the regression analysis
indicates that a higher degree of financial integration is
associated with a lower sensitivity of consumption to
income. This finding is robust to the use of a wide range of
empirical specifications, country-specific characteristics,
and other controls, such as interest rates and outcome-based
measures of financial integration. The paper also discusses
other potential sources of the temporal changes in the
sensitivity of consumption to income. |
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