INTERNATIONAL RISK-SHARING AND NONTRADED GOODS

The high correlation between savings and investment, the low cross-cou ntry correlation between consumption growth rates and the home bias in investment portfolios have been interpreted as evidence that internat ional financial markets are insufficient for complete risk-sharing. Th is paper demonstrates that these facts are consistent with complete fi nancial markets when agents face stochastic fluctuations in the output of non-traded goods. Consumer preferences over traded and non-traded goods and over the intertemporal allocation of consumption may skew po rtfolios toward claims on domestic output. A dynamic version of the mo del calibrated to estimates of the parameters describing preferences a nd technology replicates the main features of savings, investment, con sumption and output.