Working Paper
Taxes and International Risk Sharing
Abstract: We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.
JEL Classification: F41; F44; H29;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2014-06-09
Number: 1110
Pages: 41 pages