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Transport Costs, Relative Prices, and International Risk Sharing

Author

Listed:
  • Lee , Inkoo

    (Soongsil University)

  • Oh , Yonghyup

    (Korea Institute for International Economic Policy)

Abstract

This paper studies the role of the transport costs in accounting for the puzzling behaviors of relative prices and risk sharing across countries. We show that introducing the transport costs in an otherwise standard competitive model improves its ability to rationalize the deviations from the law of one price and imperfect international risk sharing. Our analysis suggests that the purchasing power parity puzzle and the consumption correlation puzzle can naturally arise in the presence of real frictions, even under the assumption of complete financial markets.

Suggested Citation

  • Lee , Inkoo & Oh , Yonghyup, 2009. "Transport Costs, Relative Prices, and International Risk Sharing," Working Papers 09-6, Korea Institute for International Economic Policy.
    • Handle: RePEc:ris:kiepwp:2009_006
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    File URL: https://ssrn.com/abstract=2955495
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    More about this item

    Keywords

    Transport Cost; Relative Price; Risk Sharing; Home-Bias;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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