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Discussion of “Deconstructing the Backus-Smith Puzzle: Non-traded Good Prices, Terms of Trade, and Risk Sharing By G. Corsetti , L. Dedola , and F. Viani. Alessandro Rebucci Inter-American Development Bank Risk Sharing Conference, October 22-23, 2010.

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The views expressed are those of the discussant and not those of the idb or its executive board

Discussion of“Deconstructing the Backus-Smith Puzzle: Non-traded Good Prices, Terms of Trade, and Risk SharingBy G. Corsetti, L. Dedola, and F. Viani

Alessandro Rebucci

Inter-American Development Bank

Risk Sharing Conference, October 22-23, 2010

The views expressed are those of the discussant and not those of the IDB or its Executive Board.


What does the paper do

What does the paper do?

  • Revisits the Backus-Smith stylized facts using spectral analysis

  • Decomposes BS statistics into traded and non-traded prices:

    Corr(rc,rer) =

    [ρ(rc,pT)σ(pT)/σ(rer)] + [ρ(rc,pNT)σ(pNT)/σ(rer)]

  • Uses evidence for a “horse race” between alternative mechanisms that can resolve the puzzle:

    • Wealth effects of ToT changes under low ω

    • BBS effects of traded TFP shocks and high ω


What does the paper find

What does the paper find?

  • Some interesting differences in BS statistics across differences frequencies:

    • BS puzzle stronger at lower frequencies

    • “Spectral analysis underscores that … the BS statistics computed with first differences … gives a distorted picture of most relations.”

  • Some evidence consistent the second mechanism

    • At least my guess of what the authors will say


First set new stylized facts on bs don t bring many news

First set: new stylized facts on BS don’t bring many news:

  • The cospectra don’t behave much differently than the correlations

    • Motivation for doing this?

    • The paper is really about splitting the rer in the BC statistic in traded and non-traded prices.

  • But I am intrigued by Figure 1 and 2:

    • We know about exchange rate predictability

    • We know they may be related

    • Worth digging more, changing window

      • How did you choose the windows for the averages in the tables?


Table from paper

Table from paper


Chart from paper

Chart from paper


Is the horse race set up fairly

Is the horse race set up fairly?

  • Both components are negative at least at low frequency

    • Both mechanism at work

  • Evidence favors second mechanism at higher frequency, but evidence on TFP and sigma is not evaluted

  • With enough free parameters …


Picture from imf staff paper on tfp

Picture from IMF Staff Paper on TFP


Wishful thinking

Wishful thinking:

  • Can the factor discussed explained also other puzzles? Or are there explanations of other puzzles that can help better understand BS one?

  • Analysis of deviations from low of one price is still missing

    • May be some interesting surprises from there


To conclude

To conclude

  • Interesting new paper in a series: rigorous and thoughtful

  • Needs to motivate better spectral analysis and particularly the choice of windows

  • Horse race need to be completed for the reader to buy implicit conclusions


Thank you

Thank you


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