Transport Costs, Relative Prices, and International Risk Sharing

41 Pages Posted: 21 Apr 2017

See all articles by Inkoo Lee

Inkoo Lee

Soongsil University

Yonghyup Oh

Korea Institute for International Economic Policy

Date Written: December 30, 2009

Abstract

This paper studies the role of the transport costs in accounting for the puzzling behaviors of relative prices and risk sharing across countries. We show that introducing the transport costs in an otherwise standard competitive model improves its ability to rationalize the deviations from the law of one price and imperfect international risk sharing. Our analysis suggests that the purchasing power parity puzzle and the consumption correlation puzzle can naturally arise in the presence of real frictions, even under the assumption of complete financial markets.

Keywords: Transport Cost, Relative Price, Risk Sharing, Home-Bias

JEL Classification: F31, F41

Suggested Citation

Lee, Inkoo and Oh, Yonghyup, Transport Costs, Relative Prices, and International Risk Sharing (December 30, 2009). KIEP Research Paper. Working paper 09-06 . Available at SSRN: https://ssrn.com/abstract=2955495 or http://dx.doi.org/10.2139/ssrn.2955495

Inkoo Lee (Contact Author)

Soongsil University ( email )

511, Sangdo-dong, Dongjak-gu
Seoul
Korea, Republic of (South Korea)

Yonghyup Oh

Korea Institute for International Economic Policy ( email )

300-4, Yomgok-Dong
Seocho-Gu
Seoul, 137-747
Korea, Republic of (South Korea)
(82) 2 3460 1022 (Phone)
(82) 2 3460 1212 (Fax)

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