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Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered

Author

Listed:
  • Patrick Minford

    (Cardiff University
    CEPR)

  • Zhirong Ou

    (Cardiff University)

  • Zheyi Zhu

    (Cardiff University)

Abstract

We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single-equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power according to Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model with which to discuss international monetary and other business cycle policies.

Suggested Citation

  • Patrick Minford & Zhirong Ou & Zheyi Zhu, 2022. "Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered," Open Economies Review, Springer, vol. 33(1), pages 109-120, February.
    • Handle: RePEc:kap:openec:v:33:y:2022:i:1:d:10.1007_s11079-021-09622-w
    DOI: 10.1007/s11079-021-09622-w
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    Cited by:

    1. Minford, Patrick & Ou, Zhirong & Zhu, Zheyi, 2023. "On the determination of the real exchange rate in free markets: do consumer risk-pooling and uncovered interest parity differ and fit?," Cardiff Economics Working Papers E2023/2, Cardiff University, Cardiff Business School, Economics Section.
    2. Minford, Patrick & Ou, Zhirong & Wickens, Michael & Zhu, Zheyi, 2021. "The eurozone: what is to be done?," Cardiff Economics Working Papers E2021/11, Cardiff University, Cardiff Business School, Economics Section.
    3. Chen, Haixia & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts," Cardiff Economics Working Papers E2023/22, Cardiff University, Cardiff Business School, Economics Section.

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    More about this item

    Keywords

    Open economy; Consumer risk-pooling; UIP; Full-model test; Indirect Inference;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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