International risk sharing and low cross-country consumption correlations: are they really inconsistent?

Michael Pakko ()

No 1994-019, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In dynamic equilibrium trade models, the common assumption that asset markets are complete implies that correlations of consumption across countries should be quite high. In contrast, measured consumption correlations tend to be rather low. While some suggest this implies that asset market incompleteness is a fundamental feature determining international trade dynamics, this paper provides an example ofa simple model economy in which complete markets can be associated with consumption correlations that are lower than output correlations. Conditions for substitution elasticities associated with this result are derived for a two-country, two-good endowment model with heterogeneous agents.

Keywords: Risk; Consumption (Economics) (search for similar items in EconPapers)
Date: 1996
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Published in Review of International Economics, August 1997, 5(3), pp. 386-400

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Related works:
Journal Article: International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent? (1997)
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