Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284164 
Year of Publication: 
2023
Series/Report no.: 
Cardiff Economics Working Papers No. E2023/02
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
We revisit the "puzzle" in open economy studies that evidence of international risk-sharing is hardly seen despite the completeness of the financial market. 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. We prove that the two models are identical, both analytically and numerically. When tested as part of the full DSGE model by indirect inference which circumvents the bias of single-equation tests, we find strong and wide evidence of international risk-sharing.
Subjects: 
consumer risk-pooling
UIP
two-country DSGE model
indirect inference test
JEL: 
C12
E12
F41
Document Type: 
Working Paper

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