International Diversification, Growth, and Welfare with Non-Traded Income Risk and Incomplete Markets
We ask how the potential benefits from cross-border asset trade are affected by the presence of non-traded income risk in incomplete markets. We show that the mean consumption growth may be lower with full integration than in financial autarky. This can occur because: the hedging demand for risky high-return projects may fall as the investment opportunity set increases, and precautionary savings may fall as the unhedgeable non-traded income variance decreases upon financial integration. We also show that international asset trade increases welfare if it increases the risk-adjusted growth rate. This is always the case in our model, but the effect may be close to negligible. The welfare gain is smaller the higher the correlation between the domestic non-traded income process and foreign asset returns.
|Date of creation:||Oct 2002|
|Date of revision:|
|Contact details of provider:|| Postal: 7491 Trondheim|
Phone: 73 59 19 40
Fax: 73 59 69 54
Web page: http://www.svt.ntnu.no/iso/WP/wp.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Devereux, Michael B. & Saito, Makoto, 1997. "Growth and risk-sharing with incomplete international assets markets," Journal of International Economics, Elsevier, vol. 42(3-4), pages 453-481, May.
- Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
- Marianne Baxter & Urban J. Jermann, 1995.
"The International Diversification Puzzle is Worse Than You Think,"
NBER Working Papers
5019, National Bureau of Economic Research, Inc.
- Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, vol. 87(1), pages 170-80, March.
- Baxter, M. & Jermann, U.J., 1993. "The International Diversification Puzzle is Worse than you Think," RCER Working Papers 350, University of Rochester - Center for Economic Research (RCER).
- 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.
- Ross Levine, 1997.
"Financial Development and Economic Growth: Views and Agenda,"
Journal of Economic Literature,
American Economic Association, vol. 35(2), pages 688-726, June.
- Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
- Devereux, Michael B & Smith, Gregor W, 1994.
"International Risk Sharing and Economic Growth,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-50, August.
- Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
- Obstfeld, Maurice, 1992.
"Risk-Taking, Global Diversification, and Growth,"
CEPR Discussion Papers
688, C.E.P.R. Discussion Papers.
- Maurice Obstfeld., 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C93-016, University of California at Berkeley.
- Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
- Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis.
- Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
- Acemoglu, Daron & Zilibotti, Fabrizio, 1996.
"Was Prometheus Unbound by Chance? Risk, Diversification and Growth,"
CEPR Discussion Papers
1426, C.E.P.R. Discussion Papers.
- Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-51, August.
- Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
- Bernard Dumas & Raman Uppal, 1999.
"Global Diversification, Growth and Welfare with Imperfectly Integrated Markets for Goods,"
NBER Working Papers
6994, National Bureau of Economic Research, Inc.
- Dumas, Bernard & Uppal, Raman, 2001. "Global Diversification, Growth, and Welfare with Imperfectly Integrated Markets for Goods," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 277-305.
- Svensson, Lars E. O. & Werner, Ingrid M., 1993.
"Nontraded assets in incomplete markets : Pricing and portfolio choice,"
European Economic Review,
Elsevier, vol. 37(5), pages 1149-1168, June.
- Svensson, L.E. & Werner, I., 1990. "Nontraded Assets in Incomplete Markets: Pricing and Portfolio Choices," Papers 477, Stockholm - International Economic Studies.
When requesting a correction, please mention this item's handle: RePEc:nst:samfok:1702. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilde Saxi Gildberg)
If references are entirely missing, you can add them using this form.