International risk sharing and commodity prices
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.
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"Commodity Prices and the Terms of Trade,"
98-01, Ohio State University, Department of Economics.
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NBER Working Papers
4975, National Bureau of Economic Research, Inc.
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