The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple...

We find that risk sharing in the European Union (EU) has been increasing over the past decade due to increased cross-ownership of assets across countries. Industrial specialization has also been increasing over the last decade and we conjecture that risk sharing plays an important causal effect...

We study the determinants of net capital income flows within the United States. We analyze a simple multi-state neoclassical model in which total factor productivity varies across states and over time and capital flows freely across state borders. The model predicts that capital will flow to...

What are the cyclical properties of US state and local government fiscal policy? The budget surplus of local and, in particular, state governments is procyclical, smoothing disposable income and consumption of state residents. This happens over both short- and medium-term horizons. Procyclical...

We provide empirical evidence that risk sharing enhances specialization in production. To the best of our knowledge, this well-established and important theoretical proposition has not been tested before. Our empirical procedure is summarized as follows. First, we construct a measure of...

We measure the amount of income insurance and cross-sectional consumption smoothing (lending and borrowing) achieved within subgroups of states, such as regions or clubs, e.g. the club of rich states. We find that there is as much income insurance between, as well as within, regions. By...

We show that international home bias in bond and equity holdings declined during the late 1990s at the same time as international risk sharing increased. Also, countries with less home bias, on average, tended to obtain more risk sharing in international markets. Using panel data estimations, we...

State-level consumption exhibits excess sensitivity to lagged income to the same extent as US aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged stste-specific income - a result that also holds for Canadian provinces. We propose the...