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International dynamic risk sharing

  • Giuseppe Cavaliere

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

  • Luca Fanelli

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

  • Attilio Gardini

    (Department of Statistical Sciences, University of Bologna, Bologna, Italy)

In this paper we examine the implications of international risk sharing among a set of countries in the presence of market frictions which complicate the instantaneous adjustment to the first-order conditions. We suggest approximating the consumption streams of countries belonging to the risk sharing coalition in terms of a disequilibrium dynamic model embodying forward-looking adjustment. Econometric methods for estimating and testing the model are discussed. Empirical analysis of a set of core European countries suggests that once preference parameters are allowed to vary across countries, we are able to identify a group of nations that share risks against idiosyncratic permanent income shocks. The equilibrium position, however, is reached after a long adjustment period. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 1-16

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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:1-16
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  1. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche 9232, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
  3. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  4. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
  5. Koenker, Roger & Machado, Jose A. F., 1999. "GMM inference when the number of moment conditions is large," Journal of Econometrics, Elsevier, vol. 93(2), pages 327-344, December.
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  7. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
  8. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  9. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  10. Gianluca Benigno & Christoph Thoenissen, 2004. " Consumption and Real Exchange Rates with Incomplete Markets and Non-traded Goods," CDMA Conference Paper Series 0405, Centre for Dynamic Macroeconomic Analysis, revised Dec 2006.
  11. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
  12. Cavaliere, Giuseppe & Fanelli, Luca & Gardini, Attilio, 2006. "Regional consumption dynamics and risk sharing in Italy," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 525-542.
  13. Jeffrey C. Fuhrer & Michael W. Klein, 1998. "Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations," NBER Working Papers 6735, National Bureau of Economic Research, Inc.
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  17. Canova, Fabio & Ravn, Morten O, 1994. "International Consumption Risk Sharing," CEPR Discussion Papers 1074, C.E.P.R. Discussion Papers.
  18. Mazzenga, Elisabetta & Ravn, Morten O, 2002. "International Business Cycles: The Quantitative Role of Transportation Costs," CEPR Discussion Papers 3530, C.E.P.R. Discussion Papers.
  19. Pierfederico Asdrubali & Soyoung Kim, 2000. "Dynamic Risk Sharing in the United States and Europe," Econometric Society World Congress 2000 Contributed Papers 1621, Econometric Society.
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  21. Giuseppe Cavaliere & Luca Fanelli & Attilio Gardini, 2008. "International dynamic risk sharing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 1-16.
  22. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Trends and cycles in the euro area: how much heterogeneity and should we worry about it?," Working Paper Series 0595, European Central Bank.
  23. Luca Fanelli, 2006. "Dynamic adjustment cost models with forward-looking behaviour," Econometrics Journal, Royal Economic Society, vol. 9(1), pages 23-47, 03.
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