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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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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?

  • 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?

  • 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:

  • 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


Chart from paper


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


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

  • 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


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