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Pooling risk among countries

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  • Callen, Michael
  • Imbs, Jean
  • Mauro, Paolo

Abstract

Suppose that international sharing risk—worldwide or with large numbers of countries—were costly. How much risk-sharing could be gained in small sets (or “pools”) of countries? To answer this question, we compute the means and variances of poolwide gross domestic product growth, for all possible pools of any size drawn from a sample of 74 countries, and compare them with the means and variances of consumption growth in each country individually. From the difference, we infer potential diversification and welfare gains. As much as two-thirds of the first best, full worldwide welfare gains can be obtained in groupings of as few as seven countries. The largest potential gains arise from pools consisting of countries in different regions and including countries with weak institutions. We argue that international risk-sharing fails to emerge because the largest potential gains are among countries that do not trust each other's willingness and ability to abide by international contractual obligations.

Suggested Citation

  • Callen, Michael & Imbs, Jean & Mauro, Paolo, 2015. "Pooling risk among countries," Journal of International Economics, Elsevier, vol. 96(1), pages 88-99.
  • Handle: RePEc:eee:inecon:v:96:y:2015:i:1:p:88-99
    DOI: 10.1016/j.jinteco.2015.01.006
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    Cited by:

    1. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    2. Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2012. "Financial integration, specialization, and systemic risk," Journal of International Economics, Elsevier, vol. 88(1), pages 150-161.
    3. Suman Basu & Ran Bi & Prakash Kannan, 2010. "Regional reserve pooling arrangements," Proceedings, Federal Reserve Bank of San Francisco, issue oct.
    4. Demyanyk, Yuliya & Volosovych, Vadym, 2008. "Gains from financial integration in the European Union: Evidence for new and old members," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 277-294, March.
    5. Baran Doda & Simon Quemin, 2018. "Linking Permit Markets Multilaterally," Working Papers 1804, Chaire Economie du climat.
    6. Yu, Changhua, 2015. "Evaluating international financial integration in a center-periphery economy," Journal of International Economics, Elsevier, vol. 95(1), pages 129-144.
    7. Callen, Michael & Imbs, Jean & Mauro, Paolo, 2015. "Pooling risk among countries," Journal of International Economics, Elsevier, vol. 96(1), pages 88-99.
    8. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    9. Edith Liu & Karen Lewis, 2012. "International Consumption Risk Is Shared After All: An Asset Return View," 2012 Meeting Papers 643, Society for Economic Dynamics.
    10. Alcidi, Cinzia & D’Imperio, Paolo & Thirion, Gilles, 2017. "Risk-sharing and Consumption-smoothing Patterns in the US and the Euro Area: A comprehensive comparison," CEPS Papers 12514, Centre for European Policy Studies.
    11. repec:bla:devchg:v:50:y:2019:i:1:p:96-121 is not listed on IDEAS
    12. Olivier J. Blanchard & Paolo Mauro & Julien Acalin, 2016. "The Case for Growth-Indexed Bonds in Advanced Economies Today," Policy Briefs PB16-2, Peterson Institute for International Economics.

    More about this item

    Keywords

    Risk sharing; Diversification; Growth-indexation; GDP-indexed instruments;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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