An unresolved issue in international macroeconomics is the apparent lack of risk-sharing across countries, which contradicts the prediction of models based on the assumption of complete markets. We assess the importance of financial frictions in this issue by constructing an incomplete market model with stationary net foreign assets (NFA) and imperfect pass-through (IPT). In this paper, there is a cost of bond holdings that allows us to incorporate the dynamics of NFA into the risk-sharing condition. On theoretical grounds, our results suggest that the dynamics of NFA may account for the lack of risk-sharing across countries. In addition, the IPT mechanism, by closing the current account channel, does not help to explain this feature of the data. On empirical grounds, we test the risk-sharing condition derived in the paper, and we find that growth factors of consumption and real exchange rates behave in a manner that may be consistent with a significant role for the net foreign asset position.

Several empirical studies have found that the exchange rate pass-through (ERPT) into import prices is not complete and declined during the 1990s. In this paper we carry out a reexamination of these findings using a unique database of disaggregated import prices both at the border and wholesale levels for Chile. Our results do not support previous conclusions. We find a complete and nondeclining ERPT in the long run at both pricing levels of Chilean imports. We extend previous evidence by showing that, in the short run, wholesale prices seem to be less sensitive to exchange rate variations. In addition, we find weak evidence of asymmetric pass-through from appreciations versus depreciations for the aggregate import indexes in the short run and the long run.

We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the insample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.

We explore the ability of traditional core inflation -consumer prices excluding food and energy-to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries. For the rest of our economies predictability is either subtle or undetectable. These results hold true even when implementing an out-of-sample test of Granger causality especially designed to compare forecasts from nested models. Our findings partially challenge the common wisdom about the ability of core inflation to forecast headline inflation, and suggest a careful weighting of the traditional exclusion of food and energy prices when assessing the size of the monetary stimulus.JEL Codes: E31, E17, E37, E52, E58

La evidencia empírica ha rechazado de manera consistente la paridad descubierta de tasas de interés y la existencia de una alta correlación de los consumos de los países. Este trabajo investiga la importancia de mercados financieros imperfectamente integrados en estos dos temas. Bajo estos mercados, se propone una estructura donde la condición que relaciona consumos y tipo de cambio real junto a la paridad de tasas se ven afectadas por la Posición de Inversión Internacional (PII) del país. Primero, encontramos evidencia para algunos países de la OECD que la PII contribuiría a explicar la falta de correlación de los consumos. Asimismo, en términos de la paridad de tasas, la PII es capaz de capturar un premio por riesgo para un pequeño grupo de países en el corto plazo.