Year: 2007
Type: article
Abstract: Typical incomplete markets models in international economics make two assumptions.First, households are not able to fully insure themselves against country-specific shocks.Second, there is a representative household within each country, so that households are fully insured against idiosyncratic shocks.We assume instead that cross-household risk-sharing is limited within countries, but cross-country risk-sharing is complete.We consider two types of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing.We show that the models imply distinct restrictions between the cross-sectional distributions of consumption and real exchange rates.We evaluate these restrictions using household-level consumption data from the United States and the United Kingdom.We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The analogous restrictions implied by the representative agent model and the DI model are rejected at conventional levels of significance.* 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.We
Source: The Economic Journal
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $4,463
Funder: National Science Foundation
OpenAlex ID: W2017632709