Borrowing constraints and international risk sharing: evidence from asymmetric error-correction

In: Applied Economics

Abstract

We analyze the adjustment process of consumption growth after
disequilibrating output shocks in a sample of OECD countries. In particular,
we test the hypothesis that consumption is smoothed to a lesser
degree after negative shocks, whereas the impact of a positive shock is
delayed for a longer period of time. Our analysis is based on an error correction
framework that allows for asymmetric adjustment. We find that the mean adjustment lag after a negative shock is significantly shorter than after a positive shock, especially since the beginning of the 1980s. This result is consistent with the interpretation that borrowing constraints limit the degree to which the impact of negative shocks on consumption can be smoothed.