Domestic and international finance: How do they affect consumption smoothing?

  • Dantao Zhu Dantao Zhu
  • Harry Huizinga Harry Huizinga

This paper uses empirical proxies for the domestic development andinternational integration of debt and equity markets to assess the role of financial development in international consumption smoothing. First, we find that both domestic and international finance contribute to international consumption smoothing. Second, domestic debt market development is relatively important in explaining consumption smoothing relative to GNP among developed countries, while international debt market integration appears to be the limiting factor among developing countries.Third, both debt and equity market development contribute to thesmoothing of consumption relative to GDP, with a somewhat larger rolefor the former than the latter. Finally, debt and equity market development reveal themselves to be substitutes in that more of one reduces the contribution of the other to consumption smoothing.

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