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International risk sharing and commodity prices

  • Martin Berka
  • Mario J. Crucini
  • Chih-Wei Wang

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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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 45 (2012)
Issue (Month): 2 (May)
Pages: 417-447

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Handle: RePEc:cje:issued:v:45:y:2012:i:2:p:417-447
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  1. 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.
  2. Lewis, Karen K, 1996. "What Can Explain the Apparent Lack of International Consumption Risk Sharing?," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 267-97, April.
  3. 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).
  4. Mario Crucini & Prasad Bidarkota, 1997. "Commodity Prices and the Terms of Trade," Working Papers 98-01, Ohio State University, Department of Economics.
  5. Michael A. Kouparitsas, 1997. "A dynamic macroeconomic analysis of NAFTA," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 14-35.
  6. 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.
  7. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
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