Economic Growth and Change
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Economic Growth and Change

National and Regional Patterns of Convergence and Divergence

Edited by John Adams and Francesco Pigliaru

The pursuit of economic growth is at the top of every nation’s policy agenda at the end of the 20th century. This authoritative and comprehensive book goes beyond the narrowly-based convergence model of economic growth by considering global, national and regional patterns of growth from a comparative perspective.
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Chapter 15: An assessment of regional risk sharing in Italy and the United Kingdom

Luca Dedola, Stefano Usai and Marco Vannini


Page 417  15. An assessment of regional risk sharing in Italy and the United Kingdom  Luca Dedola, Stefano Usai and Marco Vannini  15.1 INTRODUCTION*  The basic idea of risk sharing is the cross­sectional counterpart of the permanent income hypothesis (Cochrane, 1991). Economic agents (and governments) pursue the  insurance of consumption expenditures against income fluctuations due to shocks of different persistence. Within a competitive equilibrium, full consumption smoothing  can be achieved when financial markets are complete, but it can also obtain with incomplete financial markets, even without institutions implementing optimal policies,  under special assumptions concerning either the working of the security markets or the homogeneity of agents. The main theoretical implication of perfect risk sharing is  that individual consumption should not vary in response to idiosyncratic income shocks. At the aggregate level, for example regions within a country or nations if one  takes an international perspective, under certain assumptions Pareto­efficient risk sharing implies that changes in consumption across regions (nations) are perfectly  correlated.  The most recent empirical literature on risk sharing (Asdrubali et al., 1996; Atkeson and Bayoumi, 1993; Canova and Ravn, 1996; Obstfeld, 1989, 1994; Townsend,  1995; van Wincoop, 1995) has focused mainly on two issues, namely the degree of risk sharing achieved internationally (or within states or villages) and the  decomposition of the observed amount of income and consumption smoothing into various channels.  The general area of risk sharing and consumption smoothing has received a great deal of attention for a number of reasons. It has been...

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