Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered

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 according to Monte Carlo experiments, we find that both the ri...

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Bibliographic Details
Published in:Open economies review 2022-02, Vol.33 (1), p.109-120
Main Authors: Minford, Patrick, Ou, Zhirong, Zhu, Zheyi
Format: Article
Language:English
Subjects:
Borders
Business cycles
Development Economics
Economic Policy
Economics
Economics and Finance
European Integration
Experiments
Hypotheses
Inference
International Economics
International finance
Macroeconomics/Monetary Economics//Financial Economics
Monetary policy
Monte Carlo simulation
Policy making
Research Article
Risk
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Summary: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 according to 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 with which to discuss international monetary and other business cycle policies.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-021-09622-w