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Income Insurance And The Determinants Of Income Insurance Via Foreign Asset Revenues And Foreign Liability Payments

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Executive Summary

The authors document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from out flows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income out flows (18 percent for the EMU and 16 percent for the EU). Factor income out flows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income out flows provide insurance against negative output shocks.

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