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International Risk-Sharing and Commodity Prices

  • Martin Berka

    ()

    (Victoria University of Wellington)

  • Mario J. Crucini

    ()

    (Department of Economics, Vanderbilt University)

  • Chih-Wei Wang

    ()

    (Department of Economics, Pacific Lutheran University)

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: http://www.accessecon.com/pubs/VUECON/vu11-w21.pdf
File Function: First version, October 2011
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1121.

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Date of creation: Oct 2011
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Handle: RePEc:van:wpaper:1121
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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