Premium
International Risk Sharing and Low Cross‐Country Consumption Correlations: Are They Really Inconsistent?
Author(s) -
Pakko Michael R.
Publication year - 1997
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00064
Subject(s) - economics , consumption (sociology) , endowment , complete market , asset (computer security) , contrast (vision) , incomplete markets , econometrics , simple (philosophy) , general equilibrium theory , microeconomics , social science , philosophy , computer security , epistemology , artificial intelligence , sociology , computer science
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.