Missing Risk Sharing from International Transmission through Product Quality and Variety

Masashige Hamano

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper explores the role played by product quality and variety in interna- tional consumption risk sharing. Turnover in product quality and variety can cause a wealth effect. A reasonable Backus-Smith correlation is driven by the Harrod- Balassa-Samuelson mechanism based on heterogeneous firms. Using panel data, we test the prediction of the theoretical model and find a supportive evidence for a resolution to the Backus-Smith puzzle. The extent of \missing risk sharing" due to unobservable fluctuations in quality and the number of varieties is high in the data.

Keywords: exchange rate; consumption-real exchange rate anomaly; product quality; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: F12 F41 F43 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:17-17

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