Financial Integration and Consumption Smoothing

We test if financial integration improves household consumption smoothing using microeconomic data. We find that the process of financial market integration and liberalisation brought about by the introduction of the euro has not affected the sensitivity of consumption with respect to income shocks in Italy. This article also makes a significant contribution from a methodological point of view, because our procedure does not require that consumption and income are available in the same panel data set. It can therefore be applied in all countries in which repeated cross-sectional consumption data can be combined with panel data on income.