International Risk Sharing with Heterogeneous Firms

Masashige Hamano

No 1907, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: Little is known about the consequence of firm heterogeneity and its resulting reallocation effect on international consumption risk sharing. This paper explores international risk sharing in a theoretical model with firm heterogeneity and shows that firm heterogeneity changes the nature of international risk sharing, thus driving a wedge between relative consumption growth and real exchange rate fluctuations. A correlation is found to be conditional on the fluctuations in the number of product varieties and their qualities arising from the reallocation effect induced by heterogeneous firms; the conventional unconditional correlation can be thus biased. Using world trade data covering more than two decades, I note the existence of bias and find that the extent of international risk sharing is underestimated. The analysis indicates a larger welfare gain from international trade than we have been measuring.

Keywords: exchange rate; international risk sharing; product quality; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: F12 F41 F43 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2019-06
New Economics Papers: this item is included in nep-opm and nep-ore
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Related works:
Journal Article: International risk sharing with heterogeneous firms (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:1907

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