EconPapers    
Economics at your fingertips  
 

The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency

Giancarlo Corsetti (), Luca Dedola () and Francesca Viani ()

No 8355, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We decompose the Backus-Smith [1993] statistic --- a low or negative correlation between relative consumption and the real exchange rate at odds with a high degree of international risk sharing --- in its dynamic components at different frequencies. Using multivariate spectral analysis techniques we show that, in most OECD countries, the dynamic correlation tends to be more negative, and significantly so, at business cycle or lower frequencies --- the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation predicted by standard open-economy models is the sum of two terms: a term constant across frequencies, which can be negative as a function of uninsurable risk; a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance intertemporal trade provides against forecastable contingencies. We show that the main mechanisms proposed in the literature to account for the puzzle are consistent with the evidence.

Keywords: Incomplete markets; International Risk-Sharing; Spectral Analysis (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
Date: 2011-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8355 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The international risk sharing puzzle is at business cycle and lower frequency (2012) Downloads
Working Paper: The international risk-sharing puzzle is at business-cycle and lower frequency (2012) Downloads
Working Paper: The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency (2011) Downloads
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:cpr:ceprdp:8355

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=8355

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-12-18
Handle: RePEc:cpr:ceprdp:8355