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International Risk-Sharing in a Fragmented World

Author

Listed:
  • Javier Bianchi
  • Sebastian Horn
  • Giovanni Russo
  • César Sosa-Padilla

Abstract

This paper studies how geopolitical risk shapes financial fragmentation and international risk-sharing, using bilateral official lending data from 1910 to 2024. We document that when geopolitical risk is high, bilateral lending increasingly follows geopolitical alignment. Because geopolitically aligned countries experience more synchronized shocks, this fragmentation limits the effectiveness of international risk-sharing. To rationalize these patterns, we introduce geopolitical considerations into a limited-commitment model of sovereign borrowing. The model shows that, even with non-discriminatory default, higher geopolitical tensions redirect international lending toward allied countries and weaken risk-sharing.

Suggested Citation

  • Javier Bianchi & Sebastian Horn & Giovanni Russo & César Sosa-Padilla, 2026. "International Risk-Sharing in a Fragmented World," Working Papers 816, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:103478
    DOI: 10.21034/wp.816
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    Keywords

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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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