Consumption Risk Sharing, the Real Exchange Rate, and Borders: Why Does the Exchange Rate Make Such a Difference?

Viktoria Hnatkovska () and Michael Devereux

No 1027, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores the nature of consumption risk-sharing within and across countries. A basic prediction of efficient risk sharing is that relative consumption growth rates across countries or regions should be positively related to real exchange rate growth rates across the same areas. We provide a comprehensive investigation of this hypothesis in a multi-country and multi-regional data set. Controlling for consumption comparisons across national borders, we find significant evidence of risk sharing. Incorporating the impact of borders, however, relative consumption growth is negatively related to real exchange rate changes. In line with previous work, we find that the border effect is substantially (but not fully) accounted for by nominal exchange rate variability. We then ask whether standard open economy macro models can explain these features of the data. We argue that they cannot. In order to explain the key role of the nominal exchange rate in deviations from cross country consumption risk sharing, it is necessary to combine multiple sources of shocks, both from supply and demand, ex-ante price setting, and incomplete financial markets. The paper develops a model based on these features and investigates its ability to account for the empirical evidence on consumption risk sharing and the role of the nominal exchange rate.

Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2011/paper_1027.pdf (application/pdf)

Related works:
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:red:sed011:1027

Access Statistics for this paper

More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().