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

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Author Info

  • Doireann Fitzgerald

    (Stanford University)

Abstract

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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File URL: http://www.cas.hse.ru/Repec/pdf/CAS_RN_2007_7.pdf
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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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Related research

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

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Cited by:
  1. Martin Bodenstein, 2006. "International asset markets and real exchange rate volatility," International Finance Discussion Papers 884, Board of Governors of the Federal Reserve System (U.S.).
  2. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," CESifo Working Paper Series 4669, CESifo Group Munich.
  3. repec:diw:diwfin:diwfin04020 is not listed on IDEAS
  4. repec:diw:diwfin:diwfin04040 is not listed on IDEAS
  5. Heathcote, Jonathan & Perri, Fabrizio, 2013. "Assessing International Efficiency," CEPR Discussion Papers 9424, C.E.P.R. Discussion Papers.
  6. Buch, Claudia M. & Neugebauer, Katja & Schröder, Christoph, 2013. "Changing forces of gravity: How the crisis affected international banking," Discussion Papers 48/2013, Deutsche Bundesbank, Research Centre.

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