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Growth uncertainty and risksharing

  • Athanasoulis, Stefano G.
  • van Wincoop, Eric

How large are potential benefits from global risksharing? In order to answer this question we propose a new methodology that is closely connected with the empirical growth literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific growth in deviation from world growth on a wide set of variables in the information set. Since this residual risk can be entirely hedged through risksharing, we use it to obtain a measure of the potential welfare gain for a representative country. We find that nations can reap very large benefits from engaging in such risksharing arrangements. Using post-war data, the gain for a 35-year horizon, corresponding to an equivalent permanent increase in consumption, is 6.6% when based on a set of 49 countries, and 1.5% when based on 21 OECD countries. Using historical data from 1870 to 1990, we find that the potential gain for a 120-year horizon ranges from 4.9% for a small set of rich countries to 16.5% for a broad set of 24 countries.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 45 (2000)
Issue (Month): 3 (June)
Pages: 477-505

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Handle: RePEc:eee:moneco:v:45:y:2000:i:3:p:477-505
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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