Crisis and Consumption Smoothing

We study how the 1997-1998 Asian Financial Crisis affected consumption smoothing across households in Korean prefectures. The crisis caused the cross-sectional mean and volatility of household consumption to fall substantially. We show that such falls bias two standard tests towards rejecting consumption risk sharing. Exploiting the different sizes of bias in these two tests, we find that full risk sharing during crisis at the prefecture level could not be rejected for a consumption measure that includes nondurable goods and some services. In addition, prefecture level full risk sharing before crisis cannot be rejected at conventional significance levels in at least twelve of all fourteen prefectures. National risk sharing is, however, rejected throughout the whole sample period.