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Globalization and Risk Sharing

  • Fernando A Broner
  • Jaume Ventura

This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual and exogenous increase in the fraction of goods that are tradable. In the absence of frictions, globalization opens new goods markets and raises welfare. We assume, however, that countries cannot commit to pay their debts. Unlike the previous literature, and motivated by changes in the institutional setup of emerging-market borrowing, we also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. Although globalization still opens new goods markets, we find that it can also open or close some asset markets. The net eect on risk sharing and welfare of this process of creation and destruction of markets might be either positive or negative depending on a variety of factors that the theory highlights.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 307.

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Date of creation: Jul 2006
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Handle: RePEc:bge:wpaper:307
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