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Risk-Taking, Global Diversification, and Growth

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Obstfeld, Maurice

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Abstract

This paper develops a dynamic continuous-time model in which international risk sharing can yield substantial welfare gains through its positive effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe, but low-yield, capital into riskier, high-yield capital. The presence of these two types of capital is designed to capture the idea that growth depends on the availability of an ever-increasing array of specialized, and hence inherently risky, production inputs. A partial calibration exercise based on Penn World Table consumption data implies steady-state welfare gains from global financial integration, which for some regions amount to several times initial wealth.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 688.

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Date of creation: Aug 1992
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Handle: RePEc:cpr:ceprdp:688

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Related research
Keywords: Economic Growth International Financial Markets International Portfolio Diversification

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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References listed on IDEAS
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. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  3. Michael B. Devereux & Gregor W. Smith, 1991. "International Risk Sharing and Economic growth," Working Papers 829, Queen's University, Department of Economics.
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  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341. [Downloadable!] (restricted)
  5. Stulz, Rene M, 1987. "An Equilibrium Model of Exchange Rate Determination and Asset Pricing with Nontraded Goods and Imperfect Information," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1024-40, October. [Downloadable!] (restricted)
  6. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February. [Downloadable!] (restricted)
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  7. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October. [Downloadable!] (restricted)
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  8. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  9. Giuseppe Bertola, 1991. "Flexibility, Investment, and Growth," NBER Working Papers 3864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August. [Downloadable!] (restricted)
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  11. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  12. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Grossman, Gene M & Shapiro, Carl, 1982. "A Theory of Factor Mobility," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 1054-69, October. [Downloadable!] (restricted)
  14. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  15. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  16. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  17. Svensson, Lars E O, 1988. "Trade in Risky Assets," American Economic Review, American Economic Association, vol. 78(3), pages 375-94, June. [Downloadable!] (restricted)
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  18. Duffie, Darrell & Epstein, Larry G, 1992. "Stochastic Differential Utility," Econometrica, Econometric Society, vol. 60(2), pages 353-94, March. [Downloadable!] (restricted)
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