Household Heterogeneity and Real Exchange Rates
University of Minnesota - Twin Cities - Department of Economics
Stanford University; Centre for Economic Policy Research (CEPR)
Economic Journal, Vol. 117, No. 519, pp. C1-C25, March 2007
We assume that individuals can fully insure themselves against cross-country shocks but not against individual-specific shocks. 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.
Number of Pages in PDF File: 25Accepted Paper Series
Date posted: May 2, 2007
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