Household Heterogeneity and Real Exchange Rates

Narayana Kocherlakota and Luigi Pistaferri ()

No 6192, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We assume that individuals can fully insure themselves against cross-country shocks, but not against individual-specific shocks. We consider two particular models of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. For each model, we derive a restriction relating the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the US and the UK. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The restrictions implied by the complete risk-sharing model and the DI model fare poorly.

Keywords: market incompleteness; Pareto optimality; precautionary savings; real exchange rate (search for similar items in EconPapers)
JEL-codes: D63 E21 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2007-03
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Journal Article: Household Heterogeneity and Real Exchange Rates (2007)
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Working Paper: Household heterogeneity and real exchange rates (2006)
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