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Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation

In: NBER International Seminar on Macroeconomics 2011

  • Giancarlo Corsetti
  • Luca Dedola
  • Francesca Viani

Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand.

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This chapter was published in:
  • Jeffrey Frankel & Christopher Pissarides, 2012. "NBER International Seminar on Macroeconomics 2011," NBER Books, National Bureau of Economic Research, Inc, number fran11-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12489.
    Handle: RePEc:nbr:nberch:12489
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    12. Gianluca Benigno & Christoph Theonissen, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEP Discussion Papers dp0771, Centre for Economic Performance, LSE.
    13. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2014. "The International Dimension Of Productivity And Demand Shocks In The Us Economy," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 153-176, 02.
    14. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
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    18. Corsetti, Giancarlo & Dedola, Luca & Viani, Francesca, 2011. "The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency," CEPR Discussion Papers 8355, C.E.P.R. Discussion Papers.
    19. 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.
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    22. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
    23. Lucrezia Reichlin & Kenneth West, 2008. "NBER International Seminar on Macroeconomics 2006," NBER Books, National Bureau of Economic Research, Inc, number reic08-1, October.
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