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Risk-taking, global diversification, and growth

  • Maurice Obstfeld

This paper develops a dynamic continuous-time model in which international risk sharing can yield substantial welfare gains through its positive effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe, but low-yield, capital into riskier, high-yield capital. The presence of these two types of capital is meant to capture the idea that growth depends on the availability of an ever-increasing array of specialized, hence inherently risky, production inputs. A partial calibration exercise based on Penn World Table consumption data implies steady-state welfare gains from global financial integration that for some regions amount to several times initial wealth.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 61.

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Date of creation: 1992
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Handle: RePEc:fip:fedmem:61
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  10. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
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  12. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 327-68, May.
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  17. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
  18. Cooley, Thomas F. & Smith, Bruce D., 1998. "Financial markets, specialization, and learning by doing," Research in Economics, Elsevier, vol. 52(4), pages 333-361, December.
  19. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
  20. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-38, October.
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  23. Svensson, L.E.O., 1988. "Portfolio Choice With Non-Expected Utility In Continuous Time," Papers 423, Stockholm - International Economic Studies.
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  26. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
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