International risk-sharing and the transmission of productivity shocks
By: Giancarlo Corsetti, Luca Dedola, Sylvain Leduc.
Contributors: Dedola, Luca, 1967-; Leduc, Sylvain, 1969-
Series: International finance discussion papers ;; no. 826; International finance discussion papers (Online) ;; no. 826.
Publisher: Federal Reserve Board
Published: 2005
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with cross-country consumption ratios.  This paper shows that a standard international business cycle model with incomplete asset markets augmented with distribution services can account quantitatively for these properties of real exchange rates.  Distribution services, intensive in local inputs, drive a wedge between producer and consumer prices, thus lowering the impact of terms-of-trade changes on optimal agents' decisions.  This reduces the price elasticity of tradables separately from assumptions on preferences.  Two very different patterns of the international transmission of positive technology shocks generate the observed degree of risk-sharing: one associated with improving, the other with deteriorating terms of trade and real exchange rate.  In both cases, large equilibrium swings in international relative prices magnify consumption risk due to country-specific shocks, running counter to risk sharing.  Suggestive evidence on the effect of productivity changes in U.S. manufacturing is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements in response to supply shocks invariably foster international risk-pooling"--Federal Reserve Board web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 3/24/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.