Testing for Consumer Risk-Pooling in the Open Economy – further Results

• DOI: 10.1007/s11079-024-09782-5
• Publication Date: 2024-08-16T05:02:17Z
• Authors: Patrick Minford; Zhirong Ou; Zheyi Zhu
• Keywords: 0502 economics and business; 05 social sciences

AbstractIn this supplement to Minford et al. Int J Financ Econ 26(2):19932021 (2021), we revisit the ‘puzzle’ in open economy studies that evidence of international risk-sharing is hardly seen despite active cross-country financial markets. We reassess both risk-pooling via state-contingent bonds, and uncovered interest parity – both were believed to be different, and spuriously rejected, in previous work – in the context of a full DSGE model of the New Keynesian type. We prove that the two models are identical, both analytically and numerically. When tested as part of such a full DSGE model by indirect inference which circumvents the bias of single-equation tests, we find universal evidence of international risk-sharing.