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Commodity trade and international risk sharing : How much do financial markets matter?

  • Cole, Harold L.
  • Obstfeld, Maurice

This paper evaluates the gains from international risk sharing in some simple general-equilibrium models with output uncertainty. Under empirically plausible calibration, the Incremental loss from a ban on international portfolio diversification is estimated to be quite small--0.15 percent of output per year is a representative figure. Even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology. The paper argues that the small magnitude of potential trade gains, when coupled with small costs of cross-border financial transactions, may explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 28 (1991)
Issue (Month): 1 (August)
Pages: 3-24

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Handle: RePEc:eee:moneco:v:28:y:1991:i:1:p:3-24
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Romer, P.M., 1988. "Capital Accumulation In The Theory Of Long Run Growth," RCER Working Papers 123, University of Rochester - Center for Economic Research (RCER).
  2. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  3. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," RCER Working Papers 154, University of Rochester - Center for Economic Research (RCER).
  4. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  5. Cantor, Richard & Mark, Nelson C, 1988. "The International Transmission of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 493-507, August.
  6. Mehra, Rajnish, 1988. "On the Existence and Representation of Equilibrium in an Economy with Growth and Nonstationary Consumption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 131-35, February.
  7. Alan C. Stockman, 1987. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  8. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
  9. Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Chapters, in: National Saving and Economic Performance, pages 227-270 National Bureau of Economic Research, Inc.
  10. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  11. Mendoza, E.G., 1989. "A Quantitative Investigation Of The Macroeconomic Effects Of Capital Controls And The Stabilization Of Balance Of Trade," UWO Department of Economics Working Papers 8908, University of Western Ontario, Department of Economics.
  12. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  13. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  14. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  15. Lawrence H. Summers, 1986. "Tax Policy and International Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research, Inc.
  16. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  17. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
  18. John H. Cochrane, 1988. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc.
  19. Dellas, Harris, 1986. "A real model of the world business cycle," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 381-394, September.
  20. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
  21. Newbery, David M G & Stiglitz, Joseph E, 1982. "The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 223-46, April.
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