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International risk sharing in overlapping generations models - ScienceDirect
Source: sciencedirect.com
Article summary:
1. The article discusses the challenge of reproducing a low (or even negative) consumption-real exchange rate correlation in international data in standard two-country dynamic stochastic general equilibrium (DSGE) models.
2. The authors propose a different approach to bring theoretical outcomes closer to the data by switching the model structure from infinitely lived agents (ILA) to overlapping generations (OLG).
3. The resulting correlation between the relative aggregate national consumptions and the RER is much closer to empirically calculated values, despite the presence of a fairly comprehensive array of financial assets and robustness to changes in several key parameter values.
Article analysis:
The article provides an interesting approach for reconciling theoretical outcomes with empirical data regarding international risk sharing in overlapping generations models. The authors present their proposed solution as being more successful than other approaches, such as those involving incomplete financial markets or nontraded goods, but do not provide any evidence or comparison to support this claim. Additionally, while they note that their results are robust to changes in several key parameter values, they do not provide any details on what these parameters are or how they were chosen. Furthermore, there is no discussion of potential risks associated with their proposed solution or any counterarguments that could be made against it. As such, while the article provides an interesting perspective on international risk sharing in OLG models, its trustworthiness and reliability should be viewed with caution due to its lack of evidence and exploration of potential risks and counterarguments.