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International Risk-Sharing and Commodity Prices

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  • Martin Berka

    ()
    (Victoria University of Wellington)

  • Mario J. Crucini

    ()
    (Department of Economics, Vanderbilt University)

  • Chih-Wei Wang

    ()
    (Department of Economics, Pacific Lutheran University)

Abstract

Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w21.pdf
File Function: First version, October 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1121.

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Date of creation: Oct 2011
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Handle: RePEc:van:wpaper:1121

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Risk-sharing; developing countries; terms of trade;

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  1. Michael A. Kouparitsas, 1997. "North-South terms of trade: an empirical investigation," Working Paper Series, Macroeconomic Issues WP-97-05, Federal Reserve Bank of Chicago.
  2. Baxter, M. & Crucini, M., 1991. "Business Cycles and the Asset Structure of Foreign Trade," RCER Working Papers 316, University of Rochester - Center for Economic Research (RCER).
  3. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  4. Michael A. Kouparitsas, 1997. "A dynamic macroeconomic analysis of NAFTA," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 14-35.
  5. Bidarkota, Prasad & Crucini, Mario J, 2000. "Commodity Prices and the Terms of Trade," Review of International Economics, Wiley Blackwell, vol. 8(4), pages 647-66, November.
  6. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 928-56, October.
  7. Lewis, Karen K, 1996. "What Can Explain the Apparent Lack of International Consumption Risk Sharing?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 267-97, April.
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Cited by:
  1. Llosa, Luis-Gonzalo, 2013. "How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets," Working Papers, Banco Central de Reserva del Perú 2013-007, Banco Central de Reserva del Perú.

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