characterizing cross country consumption correlations general equilibrium models of international fluctuations that assume complete asset markets predict that consumption will be highly correlated across countries while the data display correlations that are rather low it has become common to characterize this empirical regularity by noting that cross country consumption correlations tend to be lower than corresponding output correlations this note reconsiders that charac terization and demonstrates that it is not particularly robust it also documents a related regularity that is more pervasive consumption fluctuations are more highly correlated with domestic production than with world output this provides an alternative standard for evaluating models of international fluctuations

euro dollar real exchange rate dynamics in an estimated two country model an assessment abstract several theoretical contributions using two country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics we estimate a two country model using data for the united states and the euro area and study the importance of such alternative assumptions in fitting the data a model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility and fits the dynamics of domestic variables well the complete markets assumption delivers a similar fit only when the structure of shocks is rich enough

determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

the consumption real exchange rate anomaly with extensive margins abstract this paper investigates a consumption real exchange rate anomaly from the open macroeconomics literature known as the backus smith puzzle we both analytically and quantitatively examine how an expansion of trade along extensive margins can contribute to the puzzle s resolution our argument is based on 1 a wealth effect due to changes in the number of product varieties 2 statistical inefficiency in measuring the number of product varieties and 3 market incompleteness contrary to complete asset markets which in general feature overly strong risk sharing properties changes in the number of product varieties under incomplete markets may produce a wealth effect under high trade elasticity since statistical agencies systematically fail to capture the welfare impact arising from that changes data consistent terms of trade and real exchange rates tend to appreciate due to this positive wealth effect this provides a realistic correlation between data consistent real exchange rates and consumption

non traded goods and the international transmission of fiscal policy abstract this paper looks at the effect of non traded goods on the international transmission of fiscal policy intertemporal movements in the price of non traded goods affect real interest rates differentially between countries the real interest rate effects of a fiscal expansion depend crucially upon both the composition of fiscal spending and the intertemporal elasticity of substitution with a high intertemporal elasticity of substitution in consumption a temporary fiscal expansion on non traded goods will lead consumer real interest rates to move in opposite directions between countries

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

currency risk factors in a recursive multicountry economy we study a risk sharing model featuring multiple countries with recursive prefer ences defined over bundles of consumption goods whose supply is subject to both global and local short and long run shocks first we quantify the extent of con tagion and insurance possibilities as we vary the number of countries in the econ omy second we introduce persistent heterogeneous exposure to global long run news shocks and analyze the properties of several carry trade strategies in the context of our model lustig et al 2011 hml fx and della corte et al 2013 hml na the average excess returns of these strategies can be rationalized in a recursive risk sharing scheme with long run global shocks to output growth

uninsurable risk and financial market puzzles abstract we compare the empirical performances of three risk sharing arrangements involving idiosyncratic skill shocks a where individuals are unable to directly insure their consumption against individual specific shocks b where agents strike long term insurance contract with financial intermediaries involving a truth revelation constraint as in kocherlakota and pistaferri 2009 c full risk sharing based on the widely accepted assumption of cross sectional log normality of individual consumption levels we work out closed form expressions of the pricing kernels for a and b we put these three models to test four financial market anomalies namely the equity premium currency premium risk free rate and consumption real exchange rate puzzles simultaneously in an integrated framework we find that the pricing kernel associated with a outperforms the other two models in terms of the produced estimates of the agent s preference parameters and the model ability to predict the equity and currency premia the risk free rate and the log growth in the exchange rate however the predictive ability is still far from satisfactory for all three models under scrutiny

what macroeconomic risks are not shared by international investors adopting an asset market view of international risk sharing we identify various sources of macroeconomic risk faced by international investors using a structural vector autoregression model we find that most of the risks of exogenous financial market shocks are shared by international investors through the existing asset markets however other macroeconomic risks such as those associatedwith exogenousshocks to consumption growth inflationandmonetarypolicies arenot fullysharedacrosscountries this finding helps us understand the apparently contradicting perceptions of international risk sharing generated by the analysis of asset market returns versus that of aggregate consumption growth across countries jel codes e44 f31 g12

factor models and time varying parameter framework for forecasting exchange rates and inflation a survey a survey of models used for forecasting exchange rates and inflation reveals that the factor based and time varying parameter or state space models generate superior forecasts relative to all other models this survey also finds that models based on taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates the evidence on the use of bayesian model averaging approach in forecasting exchange rates reveals limited predictive power but strong support for forecasting inflation overall the evidence overwhelmingly points to the context of the forecasts relevance of the historical data data transformation choice of the benchmark selected time horizons sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation

international risk sharing with endogenously segmented asset markets abstract asset price data imply a large degree of international risk sharing while aggregate consumption data do not we show that a model with trade in goods and endogenously segmented asset markets can account for this puzzling discrepancy active households who pay a fixed cost to transfer money into or out of assets share risk within and across countries and their marginal utility growth prices assets so asset prices imply high risk sharing inactive households consume their current income and do not share risk so aggregate consumption which averages across all households reflects lower risk sharing the model also provides a resolution to the backus smith kollmann puzzle

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

risk sharing and real exchange rates the role of non tradable sector and trend shocks abstract in this paper we show that the tradable and non tradable total factor productivity tfp processes of the us and europe have unit roots and can be modeled by a vector error correction model vecm then we develop a standard two country and two good tradable and non tradable dsge model our model implies that using cointegrated tfp processes and including non tradables help solve the real exchange rate rer volatility and risk sharing puzzles cointegrated tfp shocks or trend shocks generate significant income effects and amplify the mechanisms that produce high rer volatility moreover trend shocks can break the tight link between relative consumption and rer for low and high values of trade elasticity parameters the non tradable sector in the model improves the results for the risk sharing significantly

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

the home bias in equities and distribution costs we show that incorporating distribution costs into a general equilibrium model of international portfolio choice helps to explain the home bias in international equity investment our model is able to replicate observed investment positions for a wide range of parameter values even if agents have an incentive to hedge labor income risk by purchasing foreign equity this is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and non financial income

pooling risk among countries suppose that international sharing risk worldwide or with large numbers of countries were costly how much risk sharing could be gained in small sets or pools of countries to answer this question we compute the means and variances of poolwide gross domestic product growth for all possible pools of any size drawn from a sample of 74 countries and compare them with the means and variances of consumption growth in each country individually from the difference we infer potential diversification and welfare gains as much as two thirds of the first best full worldwide welfare gains can be obtained in groupings of as few as seven countries the largest potential gains arise from pools consisting of countries in different regions and including countries with weak institutions we argue that international risk sharing fails to emerge because the largest potential gains are among countries that do not trust each other s willingness and ability to abide by international contractual obligations

by force of demand explaining cyclical fluctuations of international trade and government spending abstract this paper explores the role of demand shocks as an alternative to productivity shocks in driving both domestic and international business cycles within the international real business cycle irbc framework in addition to those well documented domestic business cycle fluctuations e g the volatility and cyclicality of output consumption investment labor hours and labor productivity and international business cycle properties e g the countercyclical net export and the comovement puzzle this paper focuses on two additional stylized facts in the industrialized countries the procyclical trade openness the gdp fraction of trade volume and the countercyclical government size the gdp fraction of government spending using a parsimonious dynamic stochastic general equilibrium model we show that the model s predictions under productivity shocks are not consistent with these facts instead a demand shock driven model replicates the above facts while matching other domestic and international business cycle properties an estimated version of the model confirms the quantitatively important impacts of demand shocks

jumping the queue an experiment on procedural preferences abstract we present a three player queuing game to study procedural preferences in a laboratory experiment together with markets queues and waiting lists are universal procedures for allocating goods and services we designed our queuing game to disentangle motivations of outcome oriented egoistic preferences outcome oriented distributional inequality aversion preferences and outcome independent procedural preferences in a series of treatments we introduce a market element and allow two of the three players to bargain over a queue jump thus violating the queuing procedure a third player is able to engage in peer punishment to sanction queue jumping we provide evidence that a simple model of procedural preferences is able to explain the behavior of a share of the subjects in our experiment

household heterogeneity and real exchange rates we assume that individuals can fully insure themselves against cross country shocks but not against individual specifi cs hocks we consider two particular models of limited risk sharing domestically incomplete markets di and private information pareto optimal pipo risk sharing for each model we derive a restriction relating the cross sectional distributions of consumption and real exchange rates we evaluate these restrictions using household level consumption data from the us and the uk we show that the pipo restriction fits the data well when households have a coefficient of relative risk aversion of around 5 the restrictions implied by the complete risk sharing model and the di model fare poorly this paper was prepared for the economic journal lecture at the 2006 royal economic society meetings kocherlakota thanks winnie choi for many stimulating conversations about real exchange rates kocherlakota acknowledges the support of nsf 0305833 and 0606695 we thank an associate editor of the journal george alessandria and ivan werning for helpful comments jaromir nosal and sonam sherpa for research assistance orazio attanasio and andrew leicester for help with the fes data and joan gieseke and hakki yazici for editorial assistance the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

convergence rates to purchasing power parity for traded and nontraded goods this article estimates the speed of the adjustment coefficient in structural error correction models we use a system method for real exchange rates of traded and nontraded goods by combining a single equation method with hansen and sargent s instrumental variables methods for linear rational expectations models we apply these methods to a modified version of mussa s model our results show that the half lives of purchasing power parity deviations for the rates of traded goods are less than 1 year and are shorter than those for general price and for nontraded goods in most cases implying a faster adjustment speed to parity

real exchange rates preferences and incomplete markets evidence 1961 2001 many international macroeconomic models link the real exchange rate to a ratio of marginal utilities we examine this link empirically allowing the marginal utility of consumption to depend on government expenditure real money balances or external habit we also consider two environments with incomplete asset markets one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation although none of these satisfies theoretical and over identifying restrictions for every country utility with external habit persistence provides the best match with real exchange rates for oecd countries between 1961 and 2001 jel classification f41 taux de change reels preferences et marches incomplets resultats 1961 2001 plusieurs modeles macroeconomiques internationaux lient le taux de change reel a un ratio des utilites marginales on examine ce lien empiriquement en permettant a l utilite marginale de la consommation de dependre des depenses du gouvernement des encaisses monetaires reelles ou des habitudes donnees on considere aussi deux environnements avec des marches incomplets pour les actifs l un avec des marches exogenes manquants mais un taux d escompte endogene qui ancre bien la repartition des revenus et l autre avec des marches segmentes endogenes bien que ni l un ni l autre ne satisfasse les imperatifs theoriques et les restrictions sur identifiees pour chaque pays l utilite avec les persistances d habitudes externes engendre l ajustement le meilleur avec les taux de change reels des pays de l ocde entre 1961 et 2001

an empirical analysis of the dynamic programming model of stockpile acquisition strategies for china s strategic petroleum reserve abstract the world s future oil price is affected by many factors the challenge therefore is how to select optimal stockpile acquisition strategies to minimize the cost of maintaining a reserve this paper provides a new method for analyzing this problem using an uncertain dynamic programming model to analyze stockpile acquisition strategies for strategic petroleum reserve using this model we quantify the impact of uncertain world oil price on optimal stockpile acquisition strategies of china s strategic petroleum reserve for the period 2007 2010 and 2011 2020 our results show that the future stockpile acquisition is related to oil prices and their probability and if not considering the occurrence of oil supply shortage china should at least purchase 25 million barrels when world oil price is at an optimal level the optimal price of stockpile acquisition of every year has a stronger relationship with the probability of high price and the optimal expected price and size of stockpile acquisition is different in each year

commodity trade and the carry trade a tale of two countries persistent interest rate differentials account for much of the currency carry trade profitability commodity currencies offer high interest rates on average while countries that export finished goods tend to have low interest rates we develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods in the model domestic production insulates commodity producing countries from global productivity shocks forcing final good producers to absorb them commodity currency exchange rates and risk premia increase with productivity differentials and trade frictions these predictions are strongly supported in the data this article is protected by copyright all rights reserved

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

the law of one price in international commodity markets a reformulation and some formal tests abstract we report formal tests of whether the law of one price lop holds in the long and in the short run for commodities traded in orgnized markets we formalize the distinction between short and long run by introducing lagged price adjustments also we introduce expectations explicitly tests support the long run lop but they reject the short rn lop the long run lop holds better for future prices than for spot prices on average 90 per cent of the deviation from lop is eliminated within 10 weeks but this ranges from 1 to 120 weeks

risk external adjustment and capital flows abstract this paper studies the process of external adjustment i develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates interest rates and consumption in the u s and europe the model includes cross border holdings of bonds and equity and financial frictions that impede international risk sharing i find that external adjustment following endowment shocks predominantly takes place via trade flows consistent with the intertemporal approach to the current account in contrast preference shocks that change investors risk aversion induce adjustment via the trade and valuation channels where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities the model estimates imply that the valuation channel of external adjustment is more important for the u s than the trade channel consistent with this implication i show that forecasts of future return differentials contributed most to the volatility of the u s net foreign asset position in the post bretton woods era

the forward bias in the ecu peso risks vs fads and fashions abstract forward rates of european currencies against the private and official ecu exhibit a bias similar to the one found in other data the cumby obstfeld fama cof regression coefficients are systematically below unity and two thirds of them are negative we use the discount of the private ecu relative to the official ecu as a measure of market scepticism or mistrust in one view this sentiment is based on peso risk fears of realignments and possibly also the risk of a meltdown of the private ecu relative to the official one alternatively the discount just reflects fads and fashions dichotomizing the data on the basis of the size of the discount in the private ecu we find that the cof beta strongly depends on the degree of mistrust and that the negative cof coefficients are generated by typically less than 20 of the data but the pattern fits the fads and fashion view better than the peso theory if the sentiment factor contains a conventional risk premium at all then this risk premium is definitely not the one predicted by bansal bansal r 1997 an exploration of the forward premium puzzle in currency markets review of financial studies 10 369 403 nor is the sentiment factor proxying for huisman et al s huisman r koedijk k kool c nissen f 1998 extreme support for uncovered interest parity journal of international money and finance 17 211 228 transaction cost effects

spot and futures prices and the law of one price the law of one price lop is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973 80 although the lop holds as an average tendency for most of the commodities there are instances of large riskless arbitrage returns before transactions costs deviations from the lop tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract in this paper we examine how well the law of one price lop holds for commodities traded internationally the answer to this question is important for two reasons the first is that in most modern theories of exchange rates price arbitrage for at least some goods is a necessary condition to determine the level of exchange rates but recent empirical research on the behavior of various price indices casts doubt on the empirical validity of the lop across countries for even the most disaggregated indices if it is not possible to identify any commodities for which the lop works satisfactorily then models incorporating the lop will not provide an adequate description of exchange rates the second reason for studying individual commodities is to gain information on the efficiency and the degree of integration of international commodity markets in efficient markets international commodity arbitrage implies that for a standard commodity prices in two markets expressed in a common currency will not differ but for transport costs

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

time varying risk interest rates and exchange rates in general equilibrium under mild assumptions the data indicate that time varying risk is the primary force driving nominal interest rate differentials on currency denominated bonds this finding is an immediate implication of the fact that exchange rates are roughly random walks a general equilibrium monetary model with an endogenous source of risk variation a variable degree of asset market segmentation can produce key features of actual interest rates and exchange rates in this model the endogenous segmentation arises from a fixed cost for agents to exchange money for assets as inflation varies so does the benefit of asset market participation and that changes the fraction of agents participating these effects lead the risk premium to vary systematically with the level of inflation this model produces variation in the risk premium even though the fundamental shocks have constant conditional variances

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

taxes and international risk sharing abstract we extend a standard model of international risk sharing to include an empirically plausible distortion taxes the tax inclusive theory implies even under full risk sharing a predictable relationship between consumption growth and the consumption and capital income tax rates both within and across countries we find strong empirical evidence in favor of this relationship while idiosyncratic output fluctuations account for substantially more of cross country consumption growth variability than do taxes trends in tax differentials are found to be informative about the dynamic evolution of international risk sharing in particular adjusting for capital taxes reveals a marked improvement in risk sharing over the last three decades that is absent in baseline measures this improvement has been driven by the convergence of average tax rates on capital income across oecd countries toward the united states average capital tax rate

limited participation in international business cycle models a formal evaluation in this paper we study the role of limited asset market participation lamp for international business cycles we show that when limited participation is introduced into an otherwise standard model of international business cycles the performance of the model improves signi cantly especially in matching cross country correlations to perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of vuong 1989 to dsge models and accounts for the possibility that models are misspeci ed based on this test we show that the improvements brought out by lamp are statistically signi cant leading a model with lamp to outperform a representative agent model furthermore when lamp is introduced a model with complete markets is found to do better than a model with no trade in nancial assets a well known favorite in the literature our results remain robust to the inclusion of investment speci c technical change

labour market institutions and household consumption insurance within oecd countries this paper tests empirically whether the effect of idiosyncratic income shocks on aggregate consumption depends on institutional features of national labour markets the results show that in a sample of 15 oecd countries institutional heterogeneity is a significant determinant of the response of household consumption to country specific income shocks this is consistent with the idea that institutionally provided social insurance may help increase income stability when people differ in their ability to access financial markets and smooth consumption fluctuations

saving and investment in an open economy with non traded goods the authors examine a model of a small open economy in which there is free international mobility of financial capital investment in capital goods and a nontraded good such an environment is rich enough to explain several phenomena that are inexplicable in other models the authors explain why a high saving country may nonetheless borrow from abroad to finance investment they suggest an explanation of why saving and investment may be correlated even with no restrictions on trade in assets the authors also provide an optimizing model of stages in the balance of payments copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

trade costs and the open macroeconomy trade costs are known to be a major obstacle to international economic integration following the approach of new open economy macroeconomics this paper explores the effects of international trade costs in a micro founded general equilibrium model that also allows for pricing to market trade costs are shown to create an endogenous home bias in consumption and reduce cross country consumption correlations in addition trade costs magnify exchange rate volatility in response to monetary shocks and typically turn a monetary expansion into a beggar thy neighbor policy it is striking that trade costs generally lead to these results both under producer and local currency pricing

inattentive consumers and international business cycles this paper presents and studies the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently introducing inattentive consumers has important implications through a mechanism resembling the limited participation models exchange rate volatility observed in the data can be addressed for reasonable values of risk aversion the model generates more persistence in output consumption and employment which brings us closer to the data impulse responses to monetary shocks are hump shaped consistent with the empirical evidence forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate the decline in the correlation is quantitatively small for our benchmark model model generates a substantial amount of consumer forecast errors when producers are attentive and productivity shocks are persistent this specification results in a large decline of the correlation of real exchange rate and relative consumption due to consumer inattentiveness when trade elasticity is set to values at the low end of macro estimates or at higher values consistent with sectoral estimates the correlation is in the negative territory with inattentive consumers

borders and nominal exchange rates in risk sharing models of risk sharing predict that relative consumption growth rates are positively related to changes in real exchange rates we investigate this hypothesis using a new multicountry and multiregional data set within countries we find evidence for risk sharing episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation across countries however the association is reversed relative consumption and real exchange rates are negatively correlated we define this reversal as a border effect we find the border effect and show that it accounts for over half of the deviations from full risk sharing since cross border real exchange rates involve different currencies it is natural to ask how much of the border effect is accounted for by movements in exchange rates our measures indicate that a large part of the border effect comes from nominal exchange rate fluctuations we develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross country risk sharing

exchange rate mean reversion from real shocks within an intertemporal equilibrium model abstract the post bretton woods era has been characterized by real exchange rates that exhibit mean reversion with mixed evidence as to whether this reversion is partial ppp never holds or essentially complete this paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account a central feature of the model is the existence of non traded goods the model can generate partial or approximately complete mean reversion for the real exchange rate depending on parameter values if innovations in output are made up of permanent and temporary components in addition temporary output shocks generate a type of hysteresis wherein the short run path for the exchange rate permanently alters its long run equilibrium value

money capital and exchange rate fluctuations we explore how the informational frictions underlying monetary exchange aect international exchange rate dynamics our perfectly exible price model is capable of producing endogenously rigid international relative prices in response to technology and monetary shocks the model is capable of accounting for the empirical regularities that the real and nominal exchange rates are more volatile than u s output and that the two are positively and perfectly correlated the model is also consistent with other standard real business cycle facts for the u s jel classication e31 e32 e43 e44

investment composition and international business cycles abstract this paper studies a two country model with traded and nontraded sectors in which sector specific capital goods as in practice are produced by combining inputs from all sectors the model also includes nontraded distribution services employed in retailing traded goods to consumers the results show that the model with capital goods comprising multisectoral inputs outperforms the standard model in which sectoral output also serves as its capital in particular it substantially improves a the movements of trade balance and relative prices b within country comovements of sectoral and aggregate quantities c cross country comovements of output vis a vis consumption the results change only marginally when distribution services are removed from the model

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

liquidity traps capital flows abstract motivated by debates surrounding international capital flows during the great recession we conduct a positive and normative analysis of capital flows when a region of the global economy experiences a liquidity trap capital flows reduce inefficient output fluctuations in this region by inducing exchange rate movements that reallocate expenditure towards the goods it produces restricting capital mobility hampers such an adjustment from a global perspective constrained efficiency entails subsidizing capital flows to address an aggregate demand externality associated with exchange rate movements absent cooperation however dynamic terms of trade manipulation motives drive countries to inefficiently restrict capital flows impeding aggregate demand stabilization

limited asset market participation and the consumption real exchange rate anomaly under efficient consumption risk sharing as assumed in standard international business cycle models a country s aggregate consumption rises relative to foreign consumption when the country s real exchange rate depreciates yet empirically relative consumption and the real exchange rate are essentially uncorrelated i show that this consumption real exchange rate anomaly can be explained by a simple model in which a subset of households trade in complete financial markets while the remaining households lead hand to mouth htm lives htm behavior also generates greater volatility of the real exchange rate and of net exports which likewise brings the model closer to the data

hroot hamburg registration and organization online tool abstract hroot hamburg registration and organization online tool is a web based software designed for managing participants of economic experiments this package provides important features to assure a randomized invitation process based on a filtered pre specified subject pool and a complete documentation of the selection procedure for potential participants of an experiment

demand shocks and open economy puzzles abstract we pose good markets frictions on top of an otherwise standard two country international real business cycle irbc model shopping for goods takes effort which prevents perfect matching between customers and producers an increase in search effort implies increased measured productivity demand shocks increase expenditures and search effort simultaneously increasing output consumption productivity and the trade deficit and appreciating the real exchange rate thus we solve the backus smith puzzle and we show that the cross country correlation of consumption is higher than that of output standard irbc models cannot account for these puzzles along with movements in tfp

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

the exchange rate and purchasing power parity extending the theory and tests abstract this paper analyzes the exchange rate in a no arbitrage or real business cycle equilibrium model and provides empirical evidence for this model vis a vis ppp our contribution is to show based on a generalization of the equilibrium model of exchange rates that i the test equation linking the exchange rate to fundamentals should allow for international heterogeneity in time preferences and risk attitudes as well as noise that is the model should not be tested as an exact relation ii empirical work should use levels of variables rather than first differences and iii tests on the existence of long run relations should be complemented by test on the signs of the coefficients our empirical work shows that as a long run relation the generalized model outperforms ppp moreover under the generalized model quarterly deviations from the estimated long term relation have a half life of only four to five quarters

on demand shocks and international business cycle puzzles abstract this note studies a parsimonious dynamic stochastic general equilibrium model driven by demand shocks to explain two central puzzles in open economy macroeconomics the comovement puzzle backus et al 1992 and the backus smith puzzle backus and smith 1993 while matching a large set of domestic and international business cycle properties observed in the industrialized countries features such as non separable preferences non tradable sector or market incompleteness do not appear to be preconditions for resolving these long standing puzzles

trade elasticity of substitution and equilibrium dynamics abstract the empirical literature provides a wide range of estimates for trade elasticities at the aggregate level recent contributions in international macroeconomics suggest that low implied values of the trade elasticity may play an important role in understanding the disconnect between international prices and real variables however a standard model of the international business cycle displays multiple locally isolated equilibria if the trade is sufficiently low the main contribution of this paper is to compute and characterize some dynamic properties of these equilibria in simulations the presence of multiple equilibria is shown to imply a volatile and persistent real exchange rate

comments on pareto weights as wedges in two country models by d backus c coleman a ferriere and s lyon abstract backus coleman ferriere and lyon study how the formulations of preferences and shocks affect the behavior of macroeconomic and financial aggregates in a simple endowment economy with no frictions their exercise could be considered as a first step of a rich research program that can further our understanding of international business cycles after discussing the fundamental propagation mechanisms in standard international business cycle models i put their contribution in a broader context i conclude with a summary of possible research questions to be explored in future work

some evidence on the international inequality of real interest rates abstract this paper undertakes econometric tests of the hypothesis that ex ante real interest rates are equal across countries with highly integrated capital markets the issue is of practical importance because the violation of real rate equality is a necessary condition for monetary policy to influence the open economy through the real interest rate channel although an empirical literature concerning real rate equality already exists previous investigators have focused on pre tax real rates this paper contributes to the literature by attempting to incorporate the effects of taxation into the analysis

on the asset market view of exchange rates if the asset market is complete then the difference between foreign and domestic agents log intertemporal marginal rates of substitution imrss equals the log change in the real exchange rate this equation is frequently used to argue that changes in real exchange rates reflect differences between agents required compensation for exposure to asset return uncertainty we show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents imrss not in differences instead when this equation does offer insights frictions in the goods market are the source of economic distinction between agents

the effects of government spending on real exchange rates evidence from military spending panel data abstract using panel data on military spending for 125 countries we document new facts about the effects of changes in government purchases on the real exchange rate consumption and current accounts in both advanced and developing countries while an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries it causes real exchange rates to depreciate and decreases consumption in advanced countries the current account decreases in both groups of countries these findings are not consistent with standard international business cycle models we discuss potential sources of the differences between advanced and developing countries in the responses to spending shocks

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

risk sharing role of foreign aid in developing countries abstractthe effects of foreign aid on economic growth have been extensively investigated over the past 40 years however even though foreign aid can be a significant source of insurance against do

following the leader the relevance of the fed funds rate for inflation targeting countries abstract in a new keynesian model for a small open economy we derive a cpi inflation based taylor rule that implements the flexible price allocation we conclude that in this rule the natural rate of interest should be linked to the foreign interest rate and to domestic productivity shocks this rule ensures that the cpi real rate moves in order to induce movements in consumption that are coherent with the flexible price allocation the empirical evidence shows that inflation targeting central banks respond to movements in the fed funds rate besides reacting to expected cpi inflation and to the domestic output gap this is true for developed and emerging economies furthermore we find that in emerging countries the response to foreign variables is not different from zero as suggested by theory when domestic inflation rather than cpi inflation is introduced in the policy rule

home asset preference and productivity shocks abstract this paper presents sufficient conditions for the domestic investor consumer to hold in equilibrium a disproportionate share of domestic assets the analysis is carried out in a general equilibrium framework of products and assets markets when the source of the uncertainty is productivity shocks in the nontraded goods industries in the asset markets we allow trade in instruments with a payoff which is not necessarily positively correlated with the price of the consumption good as the instruments considered in the existing literature consequently in our analysis in contrast to the existing literature hedging against price uncertainty is neither necessary nor sufficient for home asset preference

setting the bar an experimental investigation of immigration requirements abstract we examine determinants of immigration requirements in a public goods game experiment with endogenous groups initially the game consists of in group players who enjoy an existing public good and out group players who may subsequently enter the group motivated by different current migration flows and anti immigration sentiments our treatments are crafted to investigate how migrants power of self determination and public debate among in group players shape immigration requirements we employ the minimal group paradigm and immigration requirements are set by in group voting in order to immigrate out group players have to fulfill minimal contribution requirements public debate fosters coherence between the requirements and in group players contributions if migrants are free to reject requirements conversely public debate among in group players fosters economic exploitation of migrants with less bargaining power overall the study illustrates the novel potential of applying well established tools from experimental economics to migration questions

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41