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International risk-sharing and the transmission of productivity shocks

Giancarlo Corsetti (), Luca Dedola () and Sylvain Leduc ()

No 308, Working Paper Series from European Central Bank

Abstract: A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to effcient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that incomplete asset markets and a low price elasticity of tradables can account quantitatively for these properties of real exchange rates. The low price elasticity stems from distribution services, intensive in local inputs, which drive a wedge between producer and consumer prices and lower the impact of terms-of-trade changes on optimal agents' decisions. Two very different patterns of the international transmission of productivity improvements generate the observed degree of risk-sharing: one associated with a strengthening, the other with a deterioration of the terms of trade and real exchange rate. Evidence on the effect of technology shocks to U.S. manufacturing, identified through long-run restrictions, is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements foster international risk-pooling. JEL Classification: F32, F33, F41

Keywords: consumption-real exchange rate; distribution margin; incomplete asset markets (search for similar items in EconPapers)
Date: 2004-02
Note: 80922
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Related works:
Journal Article: International Risk Sharing and the Transmission of Productivity Shocks (2008) Downloads
Working Paper: International risk-sharing and the transmission of productivity shocks (2005) Downloads
Working Paper: International Risk Sharing and the Transmission of Productivity Shocks (2004) Downloads
Working Paper: International Risk-Sharing and the Transmission of Productivity Shocks (2003) Downloads
Working Paper: International risk-sharing and the transmission of productivity shocks (2003) Downloads
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