Risk Sharing in a World Economy with Uncertainty Shocks

Robert Kollmann ()

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate.

Keywords: external balance; exchange rate; volatility; risk appetite; consumption-real exchange rate anmaly (search for similar items in EconPapers)
JEL-codes: F31 F32 F36 F41 F43 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2015-11
New Economics Papers: this item is included in nep-dge, nep-int, nep-opm and nep-upt
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Risk Sharing in a World Economy with Uncertainty Shocks (2015)
Working Paper: Risk sharing in a world economy with uncertainty shocks (2015)
Working Paper: Risk sharing in a world economy with uncertainty shocks (2015)
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