Traded and nontraded goods prices, and international risk ... · TRADED AND NONTRADED GOODS PRICES,...

TRADED AND NONTRADED GOODS PRICES, AND INTERNATIONAL RISK SHARING: AN EMPIRICAL INVESTIGATION

Giancarlo Corsetti, Luca Dedola and Francesca Viani

Documentos de Trabajo N.º 1242

2012

TRADED AND NONTRADED GOODS PRICES, AND INTERNATIONAL

RISK SHARING: AN EMPIRICAL INVESTIGATION

(*) Paper prepared for the 2011 ISOM conference in Malta. This paper has been published in “NBER International Seminar on Macroeconomics 2011, pages 403-466 National Bureau of Economic Research, Inc.”. We thank our referee and the editors, our discussants, Richard Clarida and Mario Crucini, as well as the seminar participants in the ISOM meeting in Malta, for useful comments. We also thank Alessandro Rebucci, Marianne Baxter, Mick De-vereux, Domenico Giannone, Robert Kollmann for useful comments on an early draft of the paper. Charles Gottlieb provided excellent research assistance. The work on this paper is part of PEGGED (Politics, Economics and Global Governance: The European Dimensions), Contract no. SSH7-CT-2008-217559 within the 7th Framework Pro-gramme for Research and Technological Development. Support from the Pierre Werner Chair Programme at the European University Institute is gratefully acknowledged. The views expressed in this paper do not necessarily reflect those of the ECB, the Bank of Spain, or any of the institutions to which the authors are are affiliated.

Giancarlo Corsetti

CAMBRIDGE UNIVERSITY, ROME III AND CEPR

Luca Dedola

EUROPEAN CENTRAL BANK AND CEPR

Francesca Viani

BANCO DE ESPAÑA

TRADED AND NONTRADED GOODS PRICES, AND INTERNATIONAL

RISK SHARING: AN EMPIRICAL INVESTIGATION (*)

Documentos de Trabajo. N.º 1242

2012

The Working Paper Series seeks to disseminate original research in economics and fi nance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment.

The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.

The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: http://www.bde.es.

Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

© 2012 by the National Bureau of Economic Research. All rights reserved.

ISSN: 1579-8666 (on line)

Abstract

Accounting for the pervasive evidence of limited international risk sharing is an important

hurdle for open-economy models, especially when these are adopted in the analysis of policy

trade-offs likely to be affected by imperfections in fi nancial markets. Key to the literature is

the evidence, at odds with effi ciency, that consumption is relatively high in countries where

its international relative price (the real exchange rate) is also high. We reconsider the relation

between cross-country consumption differentials and real exchange rates, by decomposing

it into two components, refl ecting the prices of tradable and nontradable goods, respectively.

We document that, as a common pattern among OECD countries, both components tend

to contribute to the overall lack of risk sharing, with the tradable price component playing

the dominant role in accounting for effi ciency deviations. We relate these fi ndings to two

mechanisms proposed by the literature to reconcile open economy models with the data.

One features strong Balassa-Samuelson effects on nontradable prices due to productivity

gains in the tradable sector, with a muted offsetting response of tradable prices. The other,

endogenous income effects causing nontradable but especially tradable prices to appreciate

with a rise in domestic consumption demand.

Keywords: incomplete markets, Harrod-Balassa-Samuelson effect, consumption-real

exchange rate anomaly, terms of trade, international transmission mechanism.

JEL classifi cation: F41, F42.

Resumen

Dar cuenta de la clara evidencia de una limitada diversifi cación del riesgo internacional

es un reto importante para los modelos de economía abierta, sobre todo cuando estos

se adoptan en el análisis de políticas que puedan resultar afectadas por imperfecciones

en los mercados fi nancieros. Fundamental en la literatura es la evidencia, contraria a la

efi ciencia, que el consumo es relativamente alto en los países en los que su precio relativo

internacional (el tipo de cambio real) también es alto. En este papel reconsideramos la

relación entre los diferenciales de consumo entre países y los tipos de cambio reales,

descomponiéndola en dos factores que refl ejan, respectivamente, los precios de los bienes

comerciables y no comerciables. Documentamos que, en un patrón común entre los países

de la OCDE, los dos componentes contribuyen a la falta general de diversifi cación del riesgo.

El factor de precios de bienes comerciables juega un papel dominante en la explicación

de las desviaciones de la efi ciencia. Relacionamos estos resultados con dos mecanismos

propuestos por la literatura para reconciliar los modelos de economía abierta con los datos.

Un mecanismo actúa a través de fuertes efectos Balassa-Samuelson sobre los precios

de los bienes no comerciables debidos a aumentos de productividad en el sector de

comerciables, con un débil efecto compensatorio de los precios de bienes comerciables. El

otro mecanismo actúa a través de efectos riqueza endógenos que aprecian los precios de

bienes no comerciables y especialmente los precios de comerciables debido a un aumento

de la demanda del consumo interno.

Palabras clave: mercados incompletos, efecto Harrod-Balassa-Samuelson, anomalía

consumo-tipo de cambio real, términos de intercambio, mecanismo de transmisión

internacional.

Códigos JEL: F41, F42.

BANCO DE ESPAÑA 7 DOCUMENTO DE TRABAJO N.º 1242


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0.05

0.1

0.15

0.2

0.25Home Consumption

5 10 15 20 25 30 35 40-0.25

-0.2

-0.15

-0.1

-0.05

0Foreign Consumption

5 10 15 20 25 30 35 40-3

-2.5

-2

-1.5

-1

-0.5

0Real Exchange Rate

5 10 15 20 25 30 35 40-2.5

-2

-1.5

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5 10 15 20 25 30 35 40-1

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5 10 15 20 25 30 35 40-3

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5 10 15 20 25 30 35 400

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0.2

0.3

0.4

0.5Home Relative Price of Nontradables

5 10 15 20 25 30 35 40-0.5

-0.4

-0.3

-0.2

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0Foreign Relative Price of Nontradables

temporary aggregate

temporary tradables

permanent aggregate


5 10 15 20 25 30 35 400

0.002

0.004

0.006

0.008


5 10 15 20 25 30 35 40-2

0

2

4

6x 10-4 Foreign Consumption

5 10 15 20 25 30 35 40-2

0

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4

6

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8x 10-3 Foreign PN over Home PN

5 10 15 20 25 30 35 400

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5 10 15 20 25 30 35 40-2

-1

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5 10 15 20 25 30 35 400

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permanent aggregate

temporary aggregate

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-2

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5 10 15 20 25 30 35 40-5

0

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5 10 15 20 25 30 35 40-1

0

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5 10 15 20 25 30 35 40-5

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5

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temporary aggregate

permanent aggregate


0 1 2 3

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Australia

0 1 2 3

-0.1

0

0.1Austria

0 1 2 3

-0.2-0.1

00.1

Belgium

0 1 2 3-0.4-0.2

00.2

Canada

0 1 2 3

-0.2-0.1

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Switzerland

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(RelCons,PT) (RelCons,PNT)


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Ireland

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