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Trade Costs, Asset Market Frictions and Risk Sharing: A Joint Test


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  • Doireann Fitzgerald

    (Stanford University)


Why does international consumption risk sharing fail? I propose a new test that uses data on bilateral imports to identify whether both trade costs and asset market frictions are necessary to explain this failure. I implement the test using a sample of 73 developed and developing countries, 1970-2000. The null hypothesis of no trade costs is overwhelmingly rejected for both developed and developing countries. Two versions of the test give contrasting results on the role of asset market frictions. The baseline test does not reject the null hypothesis of frictionless asset markets within developed countries, though it does reject between developed and developing countries. A variant on the baseline test .nds that the marginal utility of wealth moves with current income for both developed and developing countries. But the sensitivity of the marginal utility of wealth to income in developed countries is 1/3 of what it is in developing countries, and is only marginally signi.cantly di¤erent from zero.

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Bibliographic Info

Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number CAS_RN_2007_7.

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Length: 33 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:cas:wpaper:cas_rn_2007_7

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Keywords: Risk sharing; trade costs; asset market frictions;


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