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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 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.

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  1. 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.

  2. 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

  3. 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

  4. 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?

  5. Table from paper

  6. Chart from paper

  7. 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 …

  8. Picture from IMF Staff Paper on TFP

  9. 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

  10. 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

  11. Thank you

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