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Risk-Taking, Global Diversification, and Growth

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  • Obstfeld, Maurice

Abstract

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

Suggested Citation

  • Obstfeld, Maurice, 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers 233197, University of California-Berkeley, Department of Economics.
    • Handle: RePEc:ags:ucbewp:233197
    DOI: 10.22004/ag.econ.233197
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    More about this item

    Keywords

    International Development; Risk and Uncertainty;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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