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Trade Costs, Asset Market Frictions and Risk Sharing: A Joint Test

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  • Doireann Fitzgerald

    (Stanford University)

Abstract

This paper addresses the question of whether both goods and asset market frictions are necessary to explain the failure of consumption risk sharing across countries. I develop a test that uses bilateral import data to identify separately the role of trade costs and asset market frictions. I implement this test for a sample of 80 developed and developing countries, 1970-2000, and find that both frictions are necessary to explain the failure of perfect consumption risk sharing. At the same time, financial autarky is also rejected. Asset market frictions are relatively less important for developed than developing countries, and relatively less important in the second half of the sample period compared to the first half. Trade costs are found to be economically important, though declining in magnitude over time. The method I develop also provides estimates of the marginal utility of wealth, which is found to be more volatile in developing than developed countries.

Suggested Citation

  • Doireann Fitzgerald, 2006. "Trade Costs, Asset Market Frictions and Risk Sharing: A Joint Test," Discussion Papers 06-012, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:06-012
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    Cited by:

    1. Martin Bodenstein, 2008. "International Asset Markets and Real Exchange Rate Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 688-705, July.
    2. Eric van Wincoop & Francis E. Warnock, 2006. "Is Home Bias in Assets Related to Home Bias in Goods?," NBER Working Papers 12728, National Bureau of Economic Research, Inc.

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