International Risk-Sharing and the Transmission of Productivity Shocks

57 Pages Posted: 19 May 2004

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

European University Institute; University of Cambridge; Centre for Economic Policy Research (CEPR)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Multiple version iconThere are 2 versions of this paper

Date Written: February 2004


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 incomplete asset markets and a low price elasticity of tradables can account quantitatively for these properties of real exchange rates. The low price elasticity stems from distribution services, intensive in local inputs, which drive a wedge between producer and consumer prices and lower the impact of terms-of-trade changes on optimal agents' decisions. Two very different patterns of the international transmission of productivity improvements generate the observed degree of risk-sharing: one associated with a strengthening, the other with a deterioration of the terms of trade and real exchange rate. Evidence on the effect of technology shocks to U.S. manufacturing, identified through long-run restrictions, is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements foster international risk-pooling.

Keywords: Incomplete asset markets, distribution margin, consumption-real exchange rate anomaly

JEL Classification: F32, F33, F41

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca and Leduc, Sylvain, International Risk-Sharing and the Transmission of Productivity Shocks (February 2004). Available at SSRN: or

Giancarlo Corsetti (Contact Author)

European University Institute ( email )

University of Cambridge ( email )

Centre for Economic Policy Research (CEPR)

United Kingdom

Luca Dedola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics