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International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?

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  • Pakko, Michael R

Abstract

In dynamic-equilibrium trade models, the common assumption that asset markets are complete implies that correlations of consumption. across countries should be quite high. In contrast, measured consumption correlations tend to be rather low. While some suggest this implies that asset market incompleteness is a fundamental feature determining international trade dynamics, this paper provides an example of a simple model economy in which complete markets can be associated with consumption correlations that are lower than output correlations. Conditions for substitution elasticities associated with this result are derived for a two-country, two-good endowment model with heterogeneous agents. Copyright 1997 by Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 5 (1997)
Issue (Month): 3 (August)
Pages: 386-400

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Handle: RePEc:bla:reviec:v:5:y:1997:i:3:p:386-400

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  1. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  2. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  3. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 84-103, March.
  5. Michael R. Pakko, 1994. "Characterizing cross-country consumption correlations," Working Papers, Federal Reserve Bank of St. Louis 1994-026, Federal Reserve Bank of St. Louis.
  6. Jones, Ronald W., 1972. "Activity analysis and real incomes: Analogies with production models," Journal of International Economics, Elsevier, Elsevier, vol. 2(3), pages 277-302, August.
  7. Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(1), pages 3-16, February.
  8. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  9. Hagiwara, May, 1994. "Volatility in the terms of trade with non-identical preferences," Journal of International Money and Finance, Elsevier, Elsevier, vol. 13(3), pages 319-341, June.
  10. David Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 65, Federal Reserve Bank of Minneapolis.
  11. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 263-86, April.
  12. Feeney, JoAnne & Jones, Ronald W, 1994. "Risk Aversion and International Markets: Does Asset Trade Smooth Real Income?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 2(1), pages 13-26, February.
  13. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(3), pages 335-359.
  14. repec:fth:harver:1435 is not listed on IDEAS
  15. Stockman, Alan C. & Dellas, Harris, 1989. "International portfolio nondiversification and exchange rate variability," Journal of International Economics, Elsevier, Elsevier, vol. 26(3-4), pages 271-289, May.
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Cited by:
  1. Asdrubali, Pierfederico & Kim, Soyoung, 2008. "On the empirics of international smoothing," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(3), pages 374-381, March.
  2. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing international efficiency," Staff Report, Federal Reserve Bank of Minneapolis 480, Federal Reserve Bank of Minneapolis.
  3. Oviedo, P. Marcelo & Singh, Rajesh, 2008. "International Business Cycles with Mutliple Input Investment Technologies," Staff General Research Papers, Iowa State University, Department of Economics 32800, Iowa State University, Department of Economics.
  4. Jonathan Heathcote & Fabrizio Perri, 2003. "Why Has the U.S. Economy Become Less Correlated with the Rest of the World?," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 63-69, May.
  5. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(3), pages 601-627, April.
  6. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(1), pages 1-23, January.
  7. Oviedo, P. Marcelo & Singh, Rajesh, 2013. "Investment composition and international business cycles," Journal of International Economics, Elsevier, Elsevier, vol. 89(1), pages 79-95.
  8. W.Jos Jansen & Ad C.J.Stokman, 2003. "The Importance of Multinational Companies for Global Economic Linkages," DNB Staff Reports (discontinued), Netherlands Central Bank 99, Netherlands Central Bank.
  9. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers, Federal Reserve Bank of St. Louis 2005-043, Federal Reserve Bank of St. Louis.
  10. Kim, H. Youn, 2014. "International financial integration and risk sharing among countries: A production-based approach," Journal of the Japanese and International Economies, Elsevier, vol. 31(C), pages 16-35.

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