بازارهای سرمایه بین المللی و نوسانات نرخ ارز واقعی

The real exchange rate is very volatile relative to major macroeconomic aggregates and its correlation with the ratio of domestic over foreign consumption is negative (Backus–Smith puzzle). These two observations constitute a puzzle to standard international macroeconomic theory. This paper develops a two country model with complete asset markets and limited enforcement for international financial contracts that provides a possible explanation of these two puzzles. The model performs better than a standard incomplete markets model with a single non-contingent bond unless very tight borrowing constraints are imposed in the latter. With limited enforcement for both domestic and international financial contracts, the model's asset pricing implications are brought into line with the empirical evidence, albeit at the expense of raising real exchange rate volatility.

This paper analyzes the interplay of three classic puzzles about the real exchange rate and asset prices: 1. the high volatility of the real exchange rate relative to the volatility of consumption (real exchange rate volatilitypuzzle), 2. the negative correlation of the real exchange rate with the ratio of domestic over In their simplest form these three puzzles can be stated as follows.1If preferences over consumption are given by the power utility function and all financial markets are complete, the real exchange rate between two countries is determined by the ratio of domestic and foreign consumption. This immediately implies that the correlation between the real exchange rate and relative consumption equals unity. Since there are no wealth effects under complete markets, consumption is highly correlated across countries. Therefore, the real exchange rate hardly fluctuates. Given this apparent contradiction with the data, most international macroeconomists have concluded that interna- tional financial risk sharing is not complete. Lewis (1996) provides also direct empirical evidence that international risk sharing is incomplete. Although it is nowadays standard to assume that there are frictions in international financial markets, there has been little progress in explaining the first two puzzles. Two notable exceptions are Corsetti et al. (in press) and Benigno and Thoenissen (in press). Brandt et al. (2003) have recently challenged the view that international consumption risk sharing is very limited. Their analysis draws on the high volatility of asset prices and the implied high volatility of the intertemporal marginal rate of substitution. Real exchange rates between industrialized economies fluctuate by as much as 10% per annum. However, the intertemporal marginal rate of substitution estimated using asset returns varies by 40%. As the real exchange rate depreciates by the difference between the domestic and foreign intertemporal marginal rates of substitution, these estimated volatilities imply that the intertemporal marginal rates of substitution are highly correlated between countries. Brandt et al. interpret this finding as evidence, that international risk sharing is very good. 2 This paper attempts to clarify these contradictory conclusions about international risk sharing. I first follow Kehoe and Levine (1993) in assuming that international financial markets are complete but enforcement of international financial contracts is limited.3 Contracts are sustainable only to the extent that they can be enforced by the threat of permanent exclusion from trade in international financial markets if an agent reneges on her obligations.4The production/trade side of the economy is modeled as in Corsetti et al. (in press). The distinguishing feature of their model is that the implied elasticity of substitution between traded goods is low since non-traded goods are used in the distribution of traded goods. This feature implies that absent international financial markets the real exchange rate is very volatile and the correlation between the real exchange rate and relative consumption is negative. The key finding of my paper is that the model with complete asset markets and enforcement constraints can resolve the real exchange rate volatility puzzle and the Backus–Smith puzzle provided that agents are sufficiently impatient. If agents are impatient, only limited risk sharing can be sustained and the model behaves close to a model without international financial markets. If agents are very patient, contract enforcement works well and agents can share risk efficiently across countries. In this case consumption is highly correlated across countries, the real exchange rate is very smooth, and the correlation between the real exchange rate and relative consumption is close to unity. I also compare the model with limited contract enforcement to a model with a single non-contingent bond. The latter model fails to deliver substantial exchange rate volatility and a negative correlation between the real exchange rate and relative consumption unless tight constraints on international borrowing are imposed. 5 Because I follow the international finance literature in assuming complete and frictionless domestic asset markets and standard preferences, the model inherits all the puzzles of domestic asset pricing. In particular all asset prices areforeign consumption (Backus–Smith puzzle), 3. the low correlation of consumption across countries. I develop a two country model with complete asset markets and limited enforcement of international financial contracts that provides a possible explanation of the these puzzles.ery smooth and the equity premium is too low. 6 One potential resolution of the equity premium puzzles in a closed economy is offered by Alvarez and Jermann (2001).7 Following these ideas, I subsequently enrich my model by assuming that contract enforcement is also limited for domestic financial contracts and that agents face high personal income risk. My main findings are: first, as in the data, the intertemporal marginal rates of substitution are volatile and so are asset prices. The standard deviation of the marginal rate of substitution is about 40%. Second, the model can still replicate the findings of Backus and Smith (1993). Third, in sharp contrast to the original model, the real exchange rate is too volatile as its standard deviation rises from 7% to 60%. What explains this drastic increase? In the model changes in the real exchange rate are equal to the difference between the log of the foreign and the domestic intertemporal marginal rates of substitution. If domestic contracts are fully enforceable, the volatility of the marginal rates of substitution is determined by the low volatility of aggregate consumption and the real exchange rate is roughly as volatile as in the data. In the extended model, the high volatility of the marginal rates of substitution stems from high idiosyncratic income risk that cannot be insured efficiently due to limited enforcement in domestic asset markets. Highly volatile marginal rates of substitution with a standard deviation of roughly 40% can only be reconciled with an exchange rate volatility of around 7% if the correlation between the foreign and the domestic marginal rates of substitution is larger than 0.9. However, a correlation of 0.9 cannot arise in the model with limited enforcement as this class of models implies volatile marginal rates of substitution only if risk is not shared efficiently both domestically and internationally. The correlation of the marginal rates of substitution implied by the model, however, is 0.16. This paper is closely related to the works of Corsetti et al. (in press) and Brandt et al. (2003). Corsetti et al. address the exchange rate volatility puzzle and the Backus–Smith puzzle in a model similar to mine. However, they assume that international financial markets are exogenously incomplete: the only asset that is traded internationally is one non- state-contingent bond. I show in this paper how their results extend to an environment with a larger set of available assets. Based on the Backus–Smith puzzle, Corsetti et al. (in press) conclude like many others before that international risk sharing is very limited. 8 This conclusion stands in sharp contrast to Brandt et al. (2003) who argue the opposite based on asset return data. This contradiction arises since each group of authors considers only two of the three puzzles mentioned above. Corsetti et al. are silent on the volatility of asset prices; Brandt et al. do not relate their findings to the Backus–Smith puzzle. Scholl (2005) shows that limited enforceability substantially alters cross country-correlations and the dynamics of net exports. While this finding is in line with the results reported in this paper, her work does not address the Backus–Smith puzzle or the volatility of the real exchange rate. Colacito and Croce (2006) and Verdelhan (2007) provide useful insight into the work of Brandt et al. (2003) from a different perspective. They suggest modeling frameworks that are consistent with the observed volatility of the real exchange rate and the volatility of asset returns. Unfortunately, neither approach provides a satisfying answer to the Backus–Smith puzzle. The correlation between the real exchange rate and relative consumption is close to or equal to unity in both papers. The remainder of the paper is organized as follows. Section 2 provides a deeper introduction to the puzzles that are analyzed in this paper. In Section 3, I present a two-country model with complete international financial markets and enforcement constraints. Section 4 presents and discusses the qualitative and quantitative implications of the benchmark model. In order to address the evidence provided in Brandt et al. (2003), Section 5 extends the benchmark model to a two country model with heterogeneous agents. Section 6 concludes.

Most international macroeconomists believe that international risk sharing is limited by financial market frictions and that these frictions are key to understanding the international business cycle. This paper examines the extent to which models with endogenous incomplete markets can resolve the exchange rate volatility puzzle and the Backus–Smith puzzle. A model with complete markets and enforcement constraints for international financial contracts but frictionless domestic asset markets provides a candidate explanation of these two puzzles if agents are not too patient. For sufficiently impatient agents, international risk sharing is very limited. As a result cross country consumption levels are lowly correlated and real exchange rates are volatile and negatively correlated with relative consumption across countries. However, since asset markets are complete within each country and aggregate income fluctuations are low, the model inherits all the standard asset pricing puzzles. In particular, it implies stochastic discount factors that are too smooth vis-à-vis the data. Once I extend the benchmark model by introducing enforcement constraints also into each country’s local financial markets, the model delivers more volatile asset prices. However, it now fails to deliver the right amount of real exchange rate volatility. As risk sharing is low both within and across countries, the marginal rates of substitution in the two countries are not very correlated and the real exchange rate is too volatile in comparison to the data. It seems that models that severely restrict the amount of international risk sharing for all agents will be subject to this failure, once it has been enriched to deliver realistic asset pricing behavior.