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Globalization and Risk Sharing

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Author Info
Fernando Broner
Jaume Ventura ()

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Abstract

This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual improvement in technology that increases the fraction of goods that are tradable. With complete markets, globalization does not affect domestic trade and, thus, improves risk sharing and raises welfare. We assume, however, that markets are incomplete because countries cannot commit to pay their debts. We also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. This creates crucial interactions between domestic and international asset trade. Globalization increases the fraction of debts held by foreigners, thereby increasing the incentives to default and market incompleteness. Through this new channel, globalization might lower domestic asset trade, worsening risk sharing and lowering welfare. We show how the effects of globalization depend on various characteristics of tradable goods and explore the roles of reputation, renegotiation, and borrowing limits.

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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: Jul 2007
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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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, 2006. "Sovereign Risk and Secondary Markets," NBER Working Papers 12783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. 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:
  4. 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:
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