International Risk-Sharing and the Transmission of Productivity Shocks

57 Pages Posted: 19 May 2004

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; 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

Abstract

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). ECB Working Paper No. 308, Available at SSRN: https://ssrn.com/abstract=515073

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

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Rome, 00154
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Centre for Economic Policy Research (CEPR)

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Luca Dedola

Bank of Italy ( email )

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Rome, 00184
Italy

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
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Sylvain Leduc

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

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San Francisco, CA 94105
United States

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