Risk sharing in a world economy with uncertainty shocks

Robert Kollmann ()

No 258, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country?s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate.

JEL-codes: F31 F32 F36 F41 F43 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-11-01
New Economics Papers: this item is included in nep-dge, nep-opm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.dallasfed.org/-/media/documents/resear ... papers/2015/0258.pdf Full text (application/pdf)

Related works:
Working Paper: Risk Sharing in a World Economy with Uncertainty Shocks (2015)
Working Paper: Risk Sharing in a World Economy with Uncertainty Shocks (2015)
Working Paper: Risk sharing in a world economy with uncertainty shocks (2015)
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:fip:feddgw:258

DOI: 10.24149/gwp258

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().