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

Minford, Patrick, Ou, Zhirong and Zhu, Zheyi 2021. Is there consumer risk-pooling in the open economy? The evidence reconsidered. Open Economies Review
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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.

Item Type: Article
Status: In Press
Schools: Business (Including Economics)
Publisher: Springer Verlag
ISSN: 0923-7992
Date of First Compliant Deposit: 25 March 2021
Date of Acceptance: 23 March 2021
Last Modified: 25 Mar 2021 15:15

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