Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered

A. Patrick Minford, Zhirong Ou and Zheyi Zhu
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Zheyi Zhu: Cardiff University

Open Economies Review, 2022, vol. 33, issue 1, No 5, 109-120

Abstract: Abstract We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single-equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power according to Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model with which to discuss international monetary and other business cycle policies.

Keywords: Open economy; Consumer risk-pooling; UIP; Full-model test; Indirect Inference (search for similar items in EconPapers)
JEL-codes: C12 E12 F41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Working Paper: Is there consumer risk-pooling in the open economy? The evidence reconsidered (2020)
Working Paper: Is there consumer risk-pooling in the open economy? The evidence reconsidered (2020)
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DOI: 10.1007/s11079-021-09622-w

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