Consumption Risk-Sharing within Australia and with New Zealand

Abstract

We quantify how output risks are smoothed within Australia, and between Australia and New Zealand. About 85 percent of shocks were smoothed within Australia through credit and capital markets, with fiscal policy a source of dis-smoothing after 1992. Risk-sharing between Australia and New Zealand was greater than within Europe, occurring mostly through credit markets. With fully integrated financial markets between Australia and New Zealand since 1960, the average welfare gain would be 2.7 percent of certainty-equivalent consumption over 50 years, although these gains favour New Zealand. Australia's gains are from the pooling of PPP risks. These potential gains were largely resolved by the deregulations and CER trade agreement of the early 1980s.

Keywords: Risk-sharing, horizontal fiscal equalization, common currency, welfare gains from integration

JEL Classification: E32, F33