Spatial Consumption Risk Sharing

This paper examines how bilateral economic linkages shape consumption synchronization across economies. Using state-level data from the US, we find that the degree of bilateral consumption risk sharing decreases with geographic distance. To explain this novel fact, we develop an open economy DSGE model that incorporates trade, migration, and finance as channels of risk sharing which are subject to frictions that covary with distance. Calibrated to the US data, the model not only enables us to quantify the magnitude of the frictions in each channel, but also allows us to examine the interaction of the channels and disentangle their effects on the level, volatility, and comovement of consumption. Counterfactual analyses based on the model provide guidance for the design of macroeconomic policies that aim to reduce consumption disparity