COUNTRY SIZE, AGGREGATE FLUCTUATIONS, AND INTERNATIONAL RISK SHARING

Country size, measured by either population or gross domestic product (GDP), is shown to be negatively related to the variances of aggregate output, consumption, and investment and positively related to the con temporaneous correlations of consumption and investment with output in a sample of fifty-six countries. These results, however, hold primari ly for the high income countries of the sample. A subsample consisting of the twenty countries with the lowest per capita cop exhibits a sig nificant negative relationship only between investment volatility and country size. These empirical regularities are shown to be consistent with the implications of international risk sharing among countries of asymmetric sizes in an international real business cycle model. Shock s in relatively large countries constitute world-wide risk to a greate r extent than do similar shocks in smaller countries. Thus foreign sho cks have a greater impact on small countries, causing their aggregates to fluctuate more and their consumption and investment to be less hig hly correlated with domestic output.