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The Feasible Gains from International Risk Sharing

  • Eijffinger, Sylvester C W
  • Wagner, Wolf

We argue that since there are several impediments to international risk sharing, the welfare gains from full international risk sharing, which have been the object of analysis in the previous literature, are not suggestive. Instead, we study the gains from feasible risk sharing and find that they are considerable (0.5% increase in permanent consumption). Marginal benefits from further risk sharing are low, which indicates that feasible risk sharing can achieve most of the benefits from international risk sharing. Surprisingly, we find that sharing short-term consumption risk lowers welfare. On the basis of the results we make suggestions on how to improve existing international risk sharing systems.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2691.

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Date of creation: Feb 2001
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Handle: RePEc:cpr:ceprdp:2691
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  1. Maurice Obstfeld, 1995. "Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability," NBER Technical Working Papers 0120, National Bureau of Economic Research, Inc.
  2. Athanasoulis, Stefano G. & van Wincoop, Eric, 2000. "Growth uncertainty and risksharing," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 477-505, June.
  3. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  4. Alvarez, F. & Jermann, U.J., 2000. "Using Asset Prices to Measure the Cost of Business Cycles," Weiss Center Working Papers 00-1, Wharton School - Weiss Center for International Financial Research.
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