Labour Market Rigidities, Financial Integration and International Risk Sharing in the OECD

42 Pages Posted: 26 Jun 2007

See all articles by Jarko Fidrmuc

Jarko Fidrmuc

Zeppelin University Friedrichshafen

Neil Foster-McGregor

UNU-MERIT

Johann Scharler

University of Linz - Department of Economics

Date Written: June 2006

Abstract

Economic theory predicts that consumption growth rates should be highly correlated across countries. Empirical evidence overwhelmingly rejects this prediction. We examine whether increased financial integration and labour market rigidities can help explain this apparent contradiction between theory and empirics. Using data for OECD countries we show that although financial integration has a limited impact upon cross-country consumption correlations, labour market rigidities significantly increase consumption correlations. The results suggest that labour market rigidities improve the allocation of consumption risks either by shifting risk from employees to firms and shareholders or because it makes future income streams easier to use as collateral.

Keywords: consumption correlation puzzle, financial integration, foreign direct investment, employment protection

JEL Classification: E32, F15, E21

Suggested Citation

Fidrmuc, Jarko and Foster-McGregor, Neil and Scharler, Johann, Labour Market Rigidities, Financial Integration and International Risk Sharing in the OECD (June 2006). CESifo Working Paper No. 2028, Available at SSRN: https://ssrn.com/abstract=996567

Jarko Fidrmuc (Contact Author)

Zeppelin University Friedrichshafen ( email )

Am Seemooser Horn 20
Friedrichshafen, 88045
Germany

Neil Foster-McGregor

UNU-MERIT ( email )

Keizer Karelplein 19
Maastricht, 6211TC
Netherlands

Johann Scharler

University of Linz - Department of Economics ( email )

Altenbergerstrasse 69
Linz, A-4040
Austria

HOME PAGE: http://www.econ.jku.at/scharler

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