(a) Carefully explain the theoretical basis for the prediction stated in (1) [45%b) Is it possible to reconcile the very low levels of international consumption risk-sharing that is evident from consumption correlations across the GT countries with the significant integration of financial markets since early 1990s? Explain your answer fully.30%c) What are the explanation for the discrepancy in the empirical findings and the theoretical predictions regarding consumption risk pooling? Discuss.[25%]

4. A key prediction regarding the relationship between a country's consumption grth and the world consumption grth is given by log(a)=a+bg(:i) m where o is a constant and 3 and %are per capita consumption growth rates in the domestic country 1and the world respectively. (a) Carefully explain the theoretical basis for the prediction stated in {1). [45%] (b) Is it possible to reconcile the very low levels of international consumption risk-sharing that is evident from consumption correlations across the G? countries with the significant integration of financial markets since early 1990s? Explain your answer fully.[30%] (c) What are the explanation for the discrepancy in the empirical findings and the theoretical predictions regarding consumption risk pooling? Discuss. [25%]