International Business Cycles and Risk Sharing with Uncertainty Shocks and Recursive Preferences
Robert Kollmann ()
MPRA Paper from University Library of Munich, Germany
Abstract:
This paper analyzes the effects of output volatility shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country, two-good world with consumption home bias, 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, to compensate for the greater riskiness of the country’s output stream. This risk sharing transfer raises the country’s consumption, lowers its trade balance and appreciates its real exchange rate. In the recursive preferences framework here, volatility shocks account for a non-negligible 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 and the real exchange rate.
Keywords: uncertainty shocks; international business cycles; international risk sharing; external balance; exchange rate; consumption-real exchange rate anomaly (search for similar items in EconPapers)
JEL-codes: E3 F3 F4 F6 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac, nep-opm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/70183/1/MPRA_paper_70183.pdf original version (application/pdf)
Related works:
Journal Article: International business cycles and risk sharing with uncertainty shocks and recursive preferences (2016) 
Working Paper: International Business Cycles and Risk Sharing with Uncertainty Shocks and Recursive Preferences (2016) 
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:pra:mprapa:70183
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().