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Globalization and risk sharing

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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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Bibliographic Info

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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Web page: http://www.econ.upf.edu/

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

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