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Pooling Risk Among Countries

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  • Imbs, Jean
  • Mauro, Paolo

Abstract

We identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing are far larger than Lucas¡¦s classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Our results suggest that large welfare gains can only be achieved within groups where contracts are relatively difficult to enforce. International diversification can thus yield substantial gains, but they may remain untapped owing to potential partners¡¦weak institutional quality and a history of default on international obligations. Noting that existing risk-sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis.

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  • Imbs, Jean & Mauro, Paolo, 2007. "Pooling Risk Among Countries," CEPR Discussion Papers 6461, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6461
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    Cited by:

    1. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    2. Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2012. "Financial integration, specialization, and systemic risk," Journal of International Economics, Elsevier, vol. 88(1), pages 150-161.
    3. Suman Basu & Ran Bi & Prakash Kannan, 2010. "Regional reserve pooling arrangements," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
    4. Demyanyk, Yuliya & Volosovych, Vadym, 2008. "Gains from financial integration in the European Union: Evidence for new and old members," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 277-294, March.
    5. Yu, Changhua, 2015. "Evaluating international financial integration in a center-periphery economy," Journal of International Economics, Elsevier, vol. 95(1), pages 129-144.
    6. Callen, Michael & Imbs, Jean & Mauro, Paolo, 2015. "Pooling risk among countries," Journal of International Economics, Elsevier, vol. 96(1), pages 88-99.
    7. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    8. Edith Liu & Karen Lewis, 2012. "International Consumption Risk Is Shared After All: An Asset Return View," 2012 Meeting Papers 643, Society for Economic Dynamics.
    9. Alcidi, Cinzia & D’Imperio, Paolo & Thirion, Gilles, 2017. "Risk-sharing and Consumption-smoothing Patterns in the US and the Euro Area: A comprehensive comparison," CEPS Papers 12514, Centre for European Policy Studies.
    10. Baran Doda & Simon Quemin, 2018. "Linking Permit Markets Multilaterally," Working Papers 1804, Chaire Economie du climat.
    11. Olivier J. Blanchard & Paolo Mauro & Julien Acalin, 2016. "The Case for Growth-Indexed Bonds in Advanced Economies Today," Policy Briefs PB16-2, Peterson Institute for International Economics.

    More about this item

    Keywords

    diversification; enforceability; risk sharing;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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