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International risk sharing and commodity prices

  • Martin Berka

    ()

  • Mario J Crucini

    ()

  • Chih-Wei Wang

    ()

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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File URL: https://cama.crawford.anu.edu.au/pdf/working-papers/2011/342011.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2011-34.

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Length: 51 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:een:camaaa:2011-34
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  1. Mario Crucini & Prasad Bidarkota, 1997. "Commodity Prices and the Terms of Trade," Working Papers 98-01, Ohio State University, Department of Economics.
  2. 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 267-97, April.
  3. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  4. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  5. Michael A. Kouparitsas, 1997. "North-South terms of trade: an empirical investigation," Working Paper Series, Macroeconomic Issues WP-97-05, Federal Reserve Bank of Chicago.
  6. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  7. Michael A. Kouparitsas, 1997. "A dynamic macroeconomic analysis of NAFTA," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 14-35.
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