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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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File URL: http://www.nber.org/papers/w4093.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4093.

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Date of creation: Jun 1992
Date of revision:
Publication status: published as American Economic Review, December 1994
Handle: RePEc:nbr:nberwo:4093
Note: EFG
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  19. Lars E.O. Svensson, 1987. "Trade in Risky Assets," NBER Working Papers 2403, National Bureau of Economic Research, Inc.
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