The international risk-sharing puzzle is at business-cycle and lower frequency

Giancarlo Corsetti, Luca Dedola () and Francesca Viani

No 1212, Working Papers from Banco de España

Abstract: We decompose the correlation between relative consumption and the real exchange rate into its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, at odds with a high degree of risk-sharing, in most OECD countries the dynamic correlation tends to be quite negative, and significantly so, at frequencies lower than two years —the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation over different frequencies predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative when uninsurable risk is large; and a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance that intertemporal trade provides against forecastable contingencies. Numerical analysis suggests that leading mechanisms proposed by the literature to account for the puzzle are consistent with the evidence across the spectrum.

Keywords: Consumption-exchange rate anomaly; incomplete markets; frequency domain analysis (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-02
New Economics Papers: this item is included in nep-bec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /12/Fich/dt1212e.pdf First version, February 2012 (application/pdf)

Related works:
Journal Article: The international risk sharing puzzle is at business cycle and lower frequency (2012)
Journal Article: The international risk sharing puzzle is at business cycle and lower frequency (2012)
Working Paper: The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency (2011)
Working Paper: The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1212

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