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International risk sharing and commodity prices

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

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. Cole et Obstfeld (1991) ont développé un résultat classique montrant que les mouvements d’équilibre dans les termes d’échange pouvaient faire l’économie d’arrangements ex ante pour le partage du risque : une élasticité de substitution unitaire entre biens et spécialisations dans la production. Ce texte développe leur modèle pour N pays et M biens (N.> M). Les termes d’échange fournissent l’assurance contre les chocs spécifiques à certains biens, mais non contre les chocs en provenance de certains pays. Utilisant des données de production au niveau des biens au plan national et des prix des biens au niveau mondial, on observe une variabilité significative des termes d’échange et des réponses positives de la production spécifiquement nationale aux améliorations dans les termes d’échange. Le mécanisme endogène d’assurance via les termes d’échange mis en lumière par CO est virtuellement non‐existant.

Suggested Citation

  • Martin Berka & Mario J. Crucini & Chih‐Wei Wang, 2012. "International risk sharing and commodity prices," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 417-447, May.
  • Handle: RePEc:wly:canjec:v:45:y:2012:i:2:p:417-447
    DOI: 10.1111/j.1540-5982.2012.01706.x
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    1. 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 267-297, April.
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    Cited by:

    1. Markus K. Brunnermeier & Yuliy Sannikov, 2015. "International Credit Flows and Pecuniary Externalities," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 297-338, January.
    2. Devereux, Michael B. & Kollmann, Robert, 2012. "International Risk Sharing," MPRA Paper 70129, University Library of Munich, Germany.
    3. Hansen, James & Gross, Isaac, 2018. "Commodity price volatility with endogenous natural resources," European Economic Review, Elsevier, vol. 101(C), pages 157-180.
    4. Llosa, Luis-Gonzalo, 2013. "How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets," Working Papers 2013-007, Banco Central de Reserva del Perú.
    5. Saif Al-Abri, Almukhtar, 2014. "How does terms-of-trade behavior shape international financial integration in primary-commodity exporting economies?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 335-353.
    6. Jorge Toro & Aarón Garavito & David Camilo López & Enrique Montes, 2015. "El choque petrolero y sus implicaciones en la economía colombiana," BORRADORES DE ECONOMIA 013829, BANCO DE LA REPÚBLICA.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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