Citation

Discussion Paper Details

Please find the details for DP6192 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Household Heterogeneity and Real Exchange Rates

Author(s): Narayana Kocherlakota and Luigi Pistaferri

Publication Date: March 2007

Keyword(s): market incompleteness, Pareto optimality, precautionary savings and real exchange rate

Programme Area(s): International Macroeconomics

Abstract: We assume that individuals can fully insure themselves against cross-country shocks, but not against individual-specific shocks. We consider two particular models of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. For each model, we derive a restriction relating the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the US and the UK. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The restrictions implied by the complete risk-sharing model and the DI model fare poorly.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6192

Bibliographic Reference

Kocherlakota, N and Pistaferri, L. 2007. 'Household Heterogeneity and Real Exchange Rates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6192