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Sharing Asymmetric Tail Risk: Smoothing, Asset Pricing and Terms of Trade

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  • Corsetti, Giancarlo
  • Lipinska, Anna
  • Lombardo, Giovanni

Abstract

Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests significant quantitative effects. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation.

Suggested Citation

  • Corsetti, Giancarlo & Lipinska, Anna & Lombardo, Giovanni, 2021. "Sharing Asymmetric Tail Risk: Smoothing, Asset Pricing and Terms of Trade," CEPR Discussion Papers 16443, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:16443
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    More about this item

    Keywords

    international risk sharing; Asymmetry; Fat tails; Welfare;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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