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Globalization and risk sharing

We study the effects of globalization on risk sharing and welfare. Like previous literature, we assume that countries cannot commit to repay their debts. Unlike previous literature, we assume that countries cannot discriminate between domestic and foreign creditors when repaying their debts. This creates novel interactions between domestic and international trade in assets. (i) Increases in domestic trade raise the bene.ts of enforcement and facilitate international trade. In fact, in our setup countries can obtain international risk sharing even in the absence of default penalties. (ii) Increases in foreign trade .i.e. globalization.raise the costs of enforcement and hamper domestic trade. As a result, globalization may worsen domestic risk sharing and lower welfare. We show how these e¤ects depend on various characteristics of tradable goods and explore the roles of borrowing limits, debt renegotiations, and trade policy.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 837.

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Date of creation: Oct 2005
Date of revision: Apr 2009
Handle: RePEc:upf:upfgen:837
Contact details of provider: Web page: http://www.econ.upf.edu/

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  12. Roberto Chang & Andrés Velasco, 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Documentos de Trabajo 59, Centro de Economía Aplicada, Universidad de Chile.
  13. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
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  16. Ayhan Kose & Marco Terrones & Eswar Prasad, 2003. "Volatility and Comovement in a Globalized World Economy; An Empirical Exploration," IMF Working Papers 03/246, International Monetary Fund.
  17. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
  18. Patrick J. Kehoe & Fabrizio Perri, 2003. "Competitive equilibria with limited enforcement," Staff Report 307, Federal Reserve Bank of Minneapolis.
  19. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
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  21. Ventura, Jaume, 2005. "Global View of Economic Growth," CEPR Discussion Papers 5059, C.E.P.R. Discussion Papers.
  22. Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  23. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective," American Economic Review, American Economic Association, vol. 93(5), pages 1678-1702, December.
  24. Andrei A. Levchenko, 2005. "Financial Liberalization and Consumption Volatility in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 237-259, September.
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  26. Avinash Dixit, 1989. "Trade and Insurance with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 235-247.
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