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Testing for consumer risk-pooling in the open economy - further results

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Abstract

In this supplement to Minford et al. (2021), we revisit the 'puzzle' in open economy studies that evidence of international risk-sharing is hardly seen despite active cross-country financial markets. We reassess both risk-pooling via state-contingent bonds, and uncovered interest parity both were believed to be different, and spuriously rejected, in previous work - in the context of a full DSGE model of the New Keynesian type. We prove that the two models are identical, both analytically and numerically.When tested as part of such a full DSGE model by indirect inference which circumvents the bias of single-equation tests, we Önd universal evidence of international risk-sharing.

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  • Minford, Patrick & Ou, Zhirong & Zhu, Zheyi, 2023. "Testing for consumer risk-pooling in the open economy - further results," Cardiff Economics Working Papers E2023/3, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2023/3
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    1. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
    2. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011. "How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2078-2104.
    3. Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing Part of a DSGE Model by Indirect Inference," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(1), pages 178-194, February.
    4. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
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    More about this item

    Keywords

    consumer risk-pooling; UIP; two-country DSGE model; indirect inference test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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