International Risk Sharing with Endogenously Segmented Asset Markets
Asset price data imply a large degree international risk sharing, while aggregate consumption data do not. We evaluate how well a model with fixed costs of exchanging money for assets can account for this discrepancy. In our model, households receive idiosyncratic income shocks, and only a fraction of households adjust their asset holdings each period. These households share risk within and across countries, and their marginal utilities price assets, so asset prices imply high international risk sharing. Inactive households do not share risk, so aggregate consumption reflects low risk sharing. Quantitatively, this mechanism depends on the degree of asset market segmentation, which we choose so that the cross-sectional dispersion of consumption relative to income matches that in US data.
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