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Producer Prices versus Consumer Prices in the Measurement of Risk Sharing

Author

Listed:
  • Bent E. Sørensen
  • Oved Yosha

Abstract

In empirical research on the measurement of macroeconomic risk sharing there is no agreement on how Gross Domestic Product (GDP), or the corresponding series for regions, should be deflated. We present a stylized theoretical model that illustrates why the appropriate method for deflating nominal GDP (for the purpose of measuring risk sharing) is with a CPI deflator, not with a GDP deflator. We further explain that CPI deflated GDP (the ``consumption value'' of output) and GDP deflated with a GDP deflator (the volume of output) do represent the same underlying economic series up to measurement error. We illustrate the results estimating the amount of risk shared within subgroups of U.S. states.

Suggested Citation

  • Bent E. Sørensen & Oved Yosha, 2007. "Producer Prices versus Consumer Prices in the Measurement of Risk Sharing," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(1), pages 3-17.
    • Handle: RePEc:aeq:aeqaeq:v53_y2007_i1_q1_p3-17
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    Citations

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    Cited by:

    1. Mathias Hoffmann, 2008. "The Lack of International Consumption Risk Sharing: Can Inflation Differentials and Trading Costs Help Explain the Puzzle?," Open Economies Review, Springer, vol. 19(2), pages 183-201, April.
    2. Lukas Reiss, 2022. "Fiscal risk sharing and redistribution between Austrian states," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(1), pages 1-20, February.
    3. Vincent Labhard & Michael Sawicki, 2006. "International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD," Bank of England working papers 302, Bank of England.
    4. Aidan Corcoran, 2008. "International Financial Integration and Consumption Risk Sharing," The Institute for International Integration Studies Discussion Paper Series iiisdp241, IIIS.
    5. Lukas Reiss, 2021. "Fiscal Risk Sharing and Redistribution Between Austrian States," WIFO Working Papers 629, WIFO.
    6. Martín Fuentes, Natalia & Born, Alexandra & Bremus, Franziska & Kastelein, Wieger & Lambert, Claudia, 2023. "A deep dive into the capital channel of risk sharing in the euro area," Working Paper Series 2864, European Central Bank.

    More about this item

    Keywords

    Inter-regional insurance; U.S. states; Consumption smoothing; Volume of output; Price indices;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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