Working Paper: CEPR ID: DP7301
Authors: Robert Kollmann
Abstract: Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well.This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP?s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.
Keywords: heterogeneity; international risk sharing; real exchange rate
JEL Codes: F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PIPO model (C69) | logged real exchange rate (F31) |
| PIPO model (C69) | logged ratio of non-central moments of consumption (E21) |
| household consumption heterogeneity (D10) | real exchange rate (F31) |
| logged ratio of high-order sample consumption moments (C69) | logged real exchange rate (F31) |
| model error (C52) | macroeconomic variables (E19) |
| consumption share of the richest households (D12) | real exchange rate (F31) |