On the determination of the real exchange rate in free markets: do consumer risk-pooling and uncovered interest parity differ and fit?

A. Patrick Minford, Zhirong Ou and Zheyi Zhu
Additional contact information
Zheyi Zhu: Cardiff Business School

No E2023/2, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We revisit the puzzle in open economy studies that evidence of international risk-sharing is hardly seen despite the completeness of the financial market. We reassess both risk-pooling via state-contingent bonds, and uncovered interest parity both were believed to be different, and spuriously rejected, in previous work in the context of a full DSGE model. We prove that the two models are identical, both analytically and numerically. When tested as part of the full DSGE model by indirect inference which circumvents the bias of single-equation tests, we find strong and wide evidence of international risk-sharing.

Keywords: consumer risk-pooling; UIP; two-country DSGE model; indirect inference test (search for similar items in EconPapers)
JEL-codes: C12 E12 F41 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2023-02
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://carbsecon.com/wp/E2023_2.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2023/2

Access Statistics for this paper

More papers in Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section Contact information at EDIRC.
Bibliographic data for series maintained by Yongdeng Xu ().