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International risk sharing and commodity prices

Martin Berka (), Mario Crucini () and Chih-Wei Wang

Canadian Journal of Economics, 2012, vol. 45, issue 2, 417-447

Abstract: Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities ( N > M ). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices, we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent.

Date: 2012
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Working Paper: International risk sharing and commodity prices (2011) Downloads
Working Paper: International Risk-Sharing and Commodity Prices (2011) Downloads
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