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Globalization and Risk Sharing

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Author Info
Fernando Broner
Jaume Ventura ()

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Abstract

We study the effects of globalization on risk sharing and welfare. Like previous literature, we assume that countries cannot commit to repay their debts. Unlike previous literature, we assume that countries cannot discriminate between domestic and foreign creditors when repaying their debts. This creates novel interactions between domestic and international trade in assets. (i) Increases in domestic trade raise the bene.ts of enforcement and facilitate international trade. In fact, in our setup countries can obtain international risk sharing even in the absence of default penalties. (ii) Increases in foreign trade .i.e. globalization.raise the costs of enforcement and hamper domestic trade. As a result, globalization may worsen domestic risk sharing and lower welfare. We show how these e¤ects depend on various characteristics of tradable goods and explore the roles of borrowing limits, debt renegotiations, and trade policy.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 837.

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Date of creation: Oct 2005
Date of revision: Apr 2009
Handle: RePEc:upf:upfgen:837

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Related research
Keywords: Globalization; risk sharing; sovereign risk; domestic markets; international markets;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  25. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund. [Downloadable!]
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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. Robert M. Townsend & Kenichi Ueda, 2007. "Welfare Gains from Financial Liberalization," IMF Working Papers 07/154, International Monetary Fund. [Downloadable!]
  2. Fernando Broner & Alberto Martin & Jaume Ventura, 2007. "Enforcement Problems and Secondary Markets," Economics Working Papers 1049, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  3. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," Economics Working Papers 998, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2009. [Downloadable!]
    Other versions:
  4. Olaberria, Eduardo & Rigolini, Jamele, 2009. "Managing East Asia's macroeconomic volatility," Policy Research Working Paper Series 4989, The World Bank. [Downloadable!]
  5. Brutti, Filippo, 2008. "Legal enforcement, public supply of liquidity and sovereign risk," MPRA Paper 13949, University Library of Munich, Germany. [Downloadable!]
  6. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Comparative advantage, demand for external finance, and financial development," Policy Research Working Paper Series 3889, The World Bank. [Downloadable!]
    Other versions:
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