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Globalization and Risk Sharing

  • Broner, Fernando A
  • Ventura, Jaume

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 effect 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5820.

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Date of creation: Sep 2006
Date of revision:
Handle: RePEc:cpr:ceprdp:5820
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  1. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
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  27. repec:oup:restud:v:56:y:1989:i:2:p:235-47 is not listed on IDEAS
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  29. M. Ayhan Kose & Marco Terrones & Eswar Prasad, 2003. "Volatility and Comovement in a Globalized World Economy: An Empirical Exploration," IMF Working Papers 03/246, International Monetary Fund.
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  31. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
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