International risk sharing in the short and in the long run under country heterogeneity

Empirical tests of international risk sharing usually focus on the short run and impose homogeneity across countries. We extend the existing literature by analysing both the short run and the long run aspects of risk sharing and by using novel econometric tools that properly account for heterogeneity across a large set of countries. The results confirm that international risk sharing is only partial and quite variable across economies. However, there appears to be no trade-off between the short run and long run: countries better insured in the long run also tend to perform better in the short run, with the strength of domestic credit markets being crucial in shaping this relationship