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Net Foreing Assets and Imperfect Pass-through: The Consumption-Real Exchange Rate Anomaly

Vicente Tuesta () and Jorge Selaive ()

No 203, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: An unresolved issue in international macroeconomics is the apparent lack of risk-sharing across countries, which contradicts the prediction of models based on the assumption of complete markets. We asses the importance of international financial frictions in this issue by constructing an incomplete market model with stationary net foreign asset (NFA) and imperfect pass-through. In this paper, there is a cost of bond holding that allows us to incorporate the dynamics of the NFA position into the risk-sharing condition. On the theoretical grounds, our results suggest that the dynamics of the NFA position may account for the lack of risk-sharing across countries. In addition, the imperfect pass-through mechanism, by closing the current account channel, does not help to explain this feature of the data. On empirical grounds, we test the risk-sharing condition derived in the paper, and we find that growth factors of consumption and real exchange rates behave in a manner that may be consistent with a significant role for the net foreign asset position.

Keywords: Net Foreing Assets; Incomplete Markets; Uncovered Interest Rate Parity; Imperfect Pass-through (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-dge and nep-ifn
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