Household Heterogeneity and Real Exchange Rates

Narayana Kocherlakota and Luigi Pistaferri

Economic Journal, 2007, vol. 117, issue 519, C1-C25

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. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Date: 2007
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Working Paper: Household Heterogeneity and Real Exchange Rates (2007)
Working Paper: Household Heterogeneity and Real Exchange Rates (2006)
Working Paper: Household heterogeneity and real exchange rates (2006)
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