Discussion Paper Details

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Title: Is there consumer risk-pooling in the open economy? The evidence reconsidered

Author(s): Patrick Minford, Zhirong Ou and Zheyi Zhu

Publication Date: January 2021

Keyword(s): consumer risk-pooling, full-model test, indirect inference, Open economy and UIP

Programme Area(s): International Macroeconomics and Finance

Abstract: We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power by Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model to discuss international monetary and other business cycle issues.

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Bibliographic Reference

Minford, P, Ou, Z and Zhu, Z. 2021. 'Is there consumer risk-pooling in the open economy? The evidence reconsidered'. London, Centre for Economic Policy Research.