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Risk-Taking, Global Diversification, and Growth

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  • Maurice Obstfeld.

Abstract

This paper develops a stochastic 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. Calibration exercises based on international consumption and stock market data imply that most countries reap large steady-state welfare gains from global financial integration.
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Suggested Citation

  • 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.
    • Handle: RePEc:ucb:calbcd:c93-016
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    as
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    More about this item

    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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