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Risk-taking, global diversification, and growth

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  • Maurice Obstfeld

Abstract

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.

Suggested Citation

  • Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:61
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    More about this item

    Keywords

    International trade; Risk;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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