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Risk-Taking, Global Diversification, and Growth

  • Obstfeld, Maurice

This paper develops a continuous-time stochastic model in which international risk-sharing can yield substantial welfare gains through its effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe low-yield capital to riskier high-yield capital. The presence of these two types of capital captures the idea that growth depends on the availability of an ever-increasing array of specialized, hence inherently risky, production inputs. Calibration exercises using consumption and stock-market data imply that most countries reap large steady-state welfare gains from global financial integration. Copyright 1994 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 84 (1994)
Issue (Month): 5 (December)
Pages: 1310-29

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Handle: RePEc:aea:aecrev:v:84:y:1994:i:5:p:1310-29
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