We ask how the potential benefits from cross-border asset trade are affected by the presence of non-traded income risk in incomplete markets. We show that the mean consumption growth may be lower with full integration than in financial autarky. This can occur because: the hedging demand for risky high-return projects may fall as the investment opportunity set increases, and precautionary savings may fall as the unhedgeable non-traded income variance decreases upon financial integration. We also show that international asset trade increases welfare if it increases the risk-adjusted growth rate. This is always the case in our model, but the effect may be close to negligible. The welfare gain is smaller the higher the correlation between the domestic non-traded income process and foreign asset returns.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number
1702.
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.:
Devereux, Michael B & Smith, Gregor W, 1994.
"International Risk Sharing and Economic Growth,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-50, August.
[Downloadable!] (restricted)
Other versions: