Trade Costs, Asset Market Frictions, and Risk Sharing

American Economic Review · 2012 · Volume 102 · Issue 6

Abstract

I use bilateral import data to test for and quantify the importance of trade costs and asset market frictions in explaining the failure of perfect international consumption risk sharing. I find that while frictions in international asset markets significantly impede optimal consumption risk sharing between developed and developing countries over the period 1970-2000, developed countries are close to optimal risk sharing with each other. Trade costs, in contrast, significantly impede risk sharing for all countries. (JEL E21, E44, F14, F41, G15)

Keywords

Macroeconomics: Consumption, Saving, Wealth, Financial Markets and the Macroeconomy, Empirical Studies of Trade, Open Economy Macroeconomics, International Financial Markets

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