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Pooling Risk Among Countries

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Author Info
Imbs, Jean
Mauro, Paolo

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Abstract

We identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing are far larger than Lucas¡¦s classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Our results suggest that large welfare gains can only be achieved within groups where contracts are relatively difficult to enforce. International diversification can thus yield substantial gains, but they may remain untapped owing to potential partners¡¦weak institutional quality and a history of default on international obligations. Noting that existing risk-sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6461.

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Date of creation: Sep 2007
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Handle: RePEc:cpr:ceprdp:6461

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Related research
Keywords: diversification; enforceability; risk sharing;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Imbs, Jean & Mauro, Paolo, 2007. "Pooling Risk Among Countries," CEPR Discussion Papers 6461, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2007. "How Does Financial Globalization Affect Risk Sharing? Patterns and Channels," IZA Discussion Papers 2903, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2008. "Financial integration, specialization and systemic risk," Discussion Paper Series 1: Economic Studies 2008,23, Deutsche Bundesbank, Research Centre. [Downloadable!]
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