Growth Uncertainty And Risksharing

How large are potential benefits from global risksharing? In order to answer this question we propose a new methodology that is closely connected with the empirical growth literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific growth in deviation from world growth on a wide set of variables in the information set. Since this residual risk can be entirely hedged through risksharing, we use it to obtain a measure of the potential welfare gain for a representative country. We find that nations can reap very large benefits from engaging in such risksharing arrangements. Using post-war data, the gain for a 35-year horizon, corresponding to an equivalent permanent increase in consumption, is 6.6% when based on a set of 49 countries, and 1.5% when based on 21 OECD countries. Using historical data from 1870 to 1990, we find that the potential gain for a 120-year horizon ranges from 4.9% for a small set of rich countries to 16.5% for a broad set of 24 countries.