International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?

REVIEW OF INTERNATIONAL ECONOMICS

Posted: 13 Sep 1996

See all articles by Michael R. Pakko

Michael R. Pakko

Arkansas Economic Development Institute

Abstract

In dynamic equilibrium trade models, the common assumption that asset markets are complete implies that correlations of consumption across countries should be quite high. In contrast, measured consumption correlations tend to be rather low. While some suggest this implies that asset market incompleteness is a fundamental feature determining international trade dynamics, this paper provides an example of a simple model economy in which complete markets can be associated with consumption correlations that are lower than output correlations. Conditions for substitution elasticities associated with this result are derived for a two-country, two-good endowment model with heterogeneous agents.

JEL Classification: F41, F11, G15

Suggested Citation

Pakko, Michael R., International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?. REVIEW OF INTERNATIONAL ECONOMICS, Available at SSRN: https://ssrn.com/abstract=4216

Michael R. Pakko (Contact Author)

Arkansas Economic Development Institute ( email )

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