Date of This Version
Backus-Smith, international portfolio choice, overlapping generations, risk sharing
D52, F21, F41, G11, H55
We present a solution to the Backus-Smith puzzle that, instead of relying on extreme parameter values or complex modeling assumptions, simply switches the framework from infinitely lived agents to overlapping generations. Young agents face non-diversifiable wage risk that leads to a low degree of risk sharing within each country. Subsequently, international price movements are not sufficient to achieve the high consumption-real exchange rate correlation produced in standard infinitely lived agent DSGE models.
Working Paper Number
Staveley-O'Carroll, James and Staveley-O'Carroll, Olena M., "International Risk Sharing in Overlapping Generations Models" (2018). Economics Department Working Papers. Paper 179.