International risk-sharing and the transmission of productivity shocks

Giancarlo Corsetti, Luca Dedola () and Sylvain Leduc

No 03-19, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with relative consumptions across countries. This paper shows that a model with incomplete markets and a low price elasticity of imports can account for these properties of real exchange rates. The low price elasticity stems from introducing distribution services, which drive a wedge between producer and consumer prices and lowers the impact of terms-of-trade changes on optimal agents' decisions. In the authors' model, two very different patterns of the international transmission of productivity shocks generate the observed degree of risk-sharing: one associated with an improvement, the other with a worsening of the country's terms of trade and real exchange rate. The authors provide VAR evidence on the effect of technology shocks to U.S. manufacturing, identified through long-run restrictions, in support of the first transmission pattern. These findings are at odds with the presumption that terms-of-trade movements foster international risk-pooling.

Keywords: Foreign exchange rates; Risk; Technology (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-dge, nep-eff and nep-fin
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Citations: View citations in EconPapers (48)

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Related works:
Journal Article: International Risk Sharing and the Transmission of Productivity Shocks (2008)
Working Paper: International risk-sharing and the transmission of productivity shocks (2005)
Working Paper: International Risk Sharing and the Transmission of Productivity Shocks (2004)
Working Paper: International risk-sharing and the transmission of productivity shocks (2004)
Working Paper: International Risk-Sharing and the Transmission of Productivity Shocks (2003)
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