Abstract: (384 Views)
Based on the basic discussions of the behavior of economic agents, we know that with a concave utility function and a convex budget constraint, it is necessary to maximize inter-temporal utility, smoothing inter-temporal consumption because a risk-averse person is sensitive to consumption fluctuations. In a closed economy, impulses specific to that economy cause fluctuations in production and consumption, but the possibility of diversifying assets within the framework of a closed economy is limited. With the development of international financial markets, households can insure their consumption against country-specific impulses. According to the theory of international risk sharing, one of the benefits of global financial markets is the possibility of reducing volatility or consumption risk. This possibility is significant for countries that are exposed to exchange rate fluctuations. Many developing countries that rely on the production and export of raw goods are at risk of high volatility in real income, because the prices of these goods are very volatile and sometimes unpredictable. The reactions of production and national income in these countries to fluctuations in the price of raw materials are cyclical; A negative impulse in the exchange relationship causes economic stagnation and vice versa. Berka, Crocini, and Wang (2012) demonstrate this empirically using an extensive multi-country dataset.
Keywords: Risk sharing, interest rate
References
1. Adams, J.J., & Barret, P. (2017). Resolving International Macro Puzzles with Imperfect Risk Sharing and Global Solution Methods. Working Papers.
2. Berka, Martin, Mario Crucini and Chih-Wei Wang, 2012. International risk sharing and commodity prices. Canadian Journal of Economics 45, 417-447. [DOI:10.1111/j.1540-5982.2012.01706.x]
3. Backus, D. K., & Smith, G. W. (1993). Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics, 35(3-4), 297-316. [DOI:10.1016/0022-1996(93)90021-O]
4. Cociuba, S. E., & Ramanarayanan, A. (2019). International risk sharing with endogenously segmented asset markets. Journal of International Economics, *118*, 18-37. [DOI:10.1016/j.jinteco.2018.12.003]
5. Einzig, P. (1962). A Dynamic Theory of Forward Exchange. London: Macmillan. (IMF eLibrary)
6. Epstein, L. G., & Zin, S. E. (1991). Substitution, risk aversion, and the temporal behaviour of consumption and asset returns: An empirical analysis. Journal of Political Economy, 99(2), 263-286. [DOI:10.1086/261750]
7. Frankel, J. A., & Froot, K. A. (1987). Using survey data to test standard propositions regarding exchange rate expectations. American Economic Review, 77(1), 133-153. (IMF eLibrary)
8. French, K. R., & Poterba, J. M. (1991). Investor diversification and international equity markets. American Economic Review, 81(2), 222-226 [DOI:10.3386/w3609]
9. Galí, J., & Monacelli, T. (2005). Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies, 72(3), 707-734. [DOI:10.1111/j.1467-937X.2005.00349.x]
10. Gabaix, X., & Maggiori, M. (2022). Exchange Rate Theory: The Uncovered Interest Parity Puzzle and Beyond. Annual Review articles and lecture notes are also widely cited, though the 2015 QJE paper is the standard reference.
11. Hansen, L. P., & Hodrick, R. J. (1980). Forward exchange rates as optimal predictors of future spot rates: An econometric analysis. Journal of Political Economy, 88(5), 829-853. [DOI:10.1086/260910]
12. Harold L. Cole, & Maurice Obstfeld (1991). Commodity trade and international risk sharing: How much do financial markets matter? Journal of Monetary Economics, 28(1), 3-24. [DOI:10.1016/0304-3932(91)90023-H]
13. Harold L. Cole, & Timothy J. Kehoe (2000). Self-Fulfilling Debt Crises. Review of Economic Studies, 67(1), 91-116. [DOI:10.1111/1467-937X.00123]
14. Hess, G. D., & Shin, K. (1998). Risk and exchange rate expectations. Open Economies Review.
15. Ito, T. (1988). Use of (time-domain) vector autoregressions to test uncovered interest parity. (less cited than the AER paper). [DOI:10.2307/1928314]
16. Karen K. Lewis (2000). Why Do Stocks and Consumption Imply Such Different Gains from International Risk Sharing? Journal of International Economics, 52(1), 1-35. [DOI:10.1016/S0022-1996(99)00027-6]
17. Keynes, J. M. (1923). A Tract on Monetary Reform. London: Macmillan. (IMF eLibrary)
18. Linda L. Tesar, & Ingrid M. Werner (1995). Home Bias and High Turnover. Journal of International Money and Finance, 14(4), 467-492. [DOI:10.1016/0261-5606(95)00023-8]
19. Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624-660. [DOI:10.1086/261997]
20. Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Working Paper No. 7777. [DOI:10.3386/w7777]
21. Rouillard, J.-F. (2018). International risk sharing and financial shocks. Journal of International Money and Finance, *82*, 26-44. [DOI:10.1016/j.jimonfin.2017.12.005]
22. Wang, H. (2014). Limited participation and international risk sharing: Does the nominal exchange rate matter? (SSRN Working Paper No. 2412041). [DOI:10.2139/ssrn.2506728]
23. Adams, J.J., & Barret, P. (2017). Resolving International Macro Puzzles with Imperfect Risk Sharing and Global Solution Methods. Working Papers.
24. Berka, Martin, Mario Crucini and Chih-Wei Wang, 2012. International risk sharing and commodity prices. Canadian Journal of Economics 45, 417-447. [DOI:10.1111/j.1540-5982.2012.01706.x]
25. Backus, D. K., & Smith, G. W. (1993). Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics, 35(3-4), 297-316. [DOI:10.1016/0022-1996(93)90021-O]
26. Cociuba, S. E., & Ramanarayanan, A. (2019). International risk sharing with endogenously segmented asset markets. Journal of International Economics, *118*, 18-37. [DOI:10.1016/j.jinteco.2018.12.003]
27. Einzig, P. (1962). A Dynamic Theory of Forward Exchange. London: Macmillan. (IMF eLibrary)
28. Epstein, L. G., & Zin, S. E. (1991). Substitution, risk aversion, and the temporal behaviour of consumption and asset returns: An empirical analysis. Journal of Political Economy, 99(2), 263-286. [DOI:10.1086/261750]
29. Frankel, J. A., & Froot, K. A. (1987). Using survey data to test standard propositions regarding exchange rate expectations. American Economic Review, 77(1), 133-153. (IMF eLibrary)
30. French, K. R., & Poterba, J. M. (1991). Investor diversification and international equity markets. American Economic Review, 81(2), 222-226 [DOI:10.3386/w3609]
31. Galí, J., & Monacelli, T. (2005). Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies, 72(3), 707-734. [DOI:10.1111/j.1467-937X.2005.00349.x]
32. Gabaix, X., & Maggiori, M. (2022). Exchange Rate Theory: The Uncovered Interest Parity Puzzle and Beyond. Annual Review articles and lecture notes are also widely cited, though the 2015 QJE paper is the standard reference.
33. Hansen, L. P., & Hodrick, R. J. (1980). Forward exchange rates as optimal predictors of future spot rates: An econometric analysis. Journal of Political Economy, 88(5), 829-853. [DOI:10.1086/260910]
34. Harold L. Cole, & Maurice Obstfeld (1991). Commodity trade and international risk sharing: How much do financial markets matter? Journal of Monetary Economics, 28(1), 3-24. [DOI:10.1016/0304-3932(91)90023-H]
35. Harold L. Cole, & Timothy J. Kehoe (2000). Self-Fulfilling Debt Crises. Review of Economic Studies, 67(1), 91-116. [DOI:10.1111/1467-937X.00123]
36. Hess, G. D., & Shin, K. (1998). Risk and exchange rate expectations. Open Economies Review.
37. Ito, T. (1988). Use of (time-domain) vector autoregressions to test uncovered interest parity. (less cited than the AER paper). [DOI:10.2307/1928314]
38. Karen K. Lewis (2000). Why Do Stocks and Consumption Imply Such Different Gains from International Risk Sharing? Journal of International Economics, 52(1), 1-35. [DOI:10.1016/S0022-1996(99)00027-6]
39. Keynes, J. M. (1923). A Tract on Monetary Reform. London: Macmillan. (IMF eLibrary)
40. Linda L. Tesar, & Ingrid M. Werner (1995). Home Bias and High Turnover. Journal of International Money and Finance, 14(4), 467-492. [DOI:10.1016/0261-5606(95)00023-8]
41. Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624-660. [DOI:10.1086/261997]
42. Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Working Paper No. 7777. [DOI:10.3386/w7777]
43. Rouillard, J.-F. (2018). International risk sharing and financial shocks. Journal of International Money and Finance, *82*, 26-44. [DOI:10.1016/j.jimonfin.2017.12.005]
44. Wang, H. (2014). Limited participation and international risk sharing: Does the nominal exchange rate matter? (SSRN Working Paper No. 2412041). [DOI:10.2139/ssrn.2506728]
| Rights and permissions | |
.jpg) |
This work is licensed under a Creative Commons Attribution 4.0 International License. |
