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The international risk-sharing puzzle is at business-cycle and lower frequency

  • Giancarlo Corsetti

    (Cambridge University)

  • Luca Dedola

    (European Central Bank)

  • Francesca Viani

    ()

    (Banco de España)

We decompose the correlation between relative consumption and the real exchange rate into its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, at odds with a high degree of risk-sharing, in most OECD countries the dynamic correlation tends to be quite negative, and significantly so, at frequencies lower than two years —the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation over different frequencies predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative when uninsurable risk is large; and a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance that intertemporal trade provides against forecastable contingencies. Numerical analysis suggests that leading mechanisms proposed by the literature to account for the puzzle are consistent with the evidence across the spectrum.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1212e.pdf
File Function: First version, February 2012
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1212.

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Length: 34 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:bde:wpaper:1212
Contact details of provider: Web page: http://www.bde.es/
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  1. Ghironi, Fabio & Melitz, Marc, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Scholarly Articles 3228377, Harvard University Department of Economics.
  2. Pula, Gabor & Santabárbara, Daniel, 2011. "Is China climbing up the quality ladder? Estimating cross country differences in product quality using Eurostat's COMEXT trade database," Working Paper Series 1310, European Central Bank.
  3. Pietro Cova & Massimiliano Pisani & Nicoletta Batini & Alessandro Rebucci, 2008. "Productivity and Global Imbalances: The Role of Nontradable Total Factor Productivity in Advanced Economies," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 312-325, June.
  4. Pau Rabanal & Juan F. Rubio-Ramirez, 2015. "Can international macroeconomic models explain low-frequency movements of real exchange rates?," Working Papers 1508, BBVA Bank, Economic Research Department.
  5. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
  6. Benigno, Gianluca & Thoenissen, Christoph, 2008. "Consumption and real exchange rates with incomplete markets and non-traded goods," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 926-948, October.
  7. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2011. "Traded and Nontraded Goods Prices, and International Risk Sharing: an Empirical Investigation," NBER Working Papers 17501, National Bureau of Economic Research, Inc.
  8. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  9. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1113-1128, September.
  10. Robert Kollmann, 1995. "Consumption, real exchange rates and the structure of international asset markets," ULB Institutional Repository 2013/7642, ULB -- Universite Libre de Bruxelles.
  11. Christophe Croux & Mario Forni & Lucrezia Reichlin, 2001. "A measure of co-movement for economic variables: theory and empirics," ULB Institutional Repository 2013/10139, ULB -- Universite Libre de Bruxelles.
  12. Aitor Lacuesta & Sergio Puente & Ernesto Villanueva, 2011. "The schooling response to a sustained increase in low-skill wages: evidence from Spain 1989-2009," Banco de Espa�a Working Papers 1208, Banco de Espa�a.
  13. 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.
  14. Ravn, Morten O, 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers 2940, C.E.P.R. Discussion Papers.
  15. Deokwoo Nam & Jian Wang, 2010. "Understanding the effect of productivity changes on international relative prices: the role of news shocks," Globalization and Monetary Policy Institute Working Paper 61, Federal Reserve Bank of Dallas.
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