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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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  13. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  14. Jose Vicente Martinez and Guido Sandleris, 2008. "Is it Punishment? Sovereign Defaults and the Decline in Trade," Business School Working Papers 2008-01, Universidad Torcuato Di Tella.
  15. 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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  18. Arteta, Carlos & Eichengreen, Barry & Wyplosz, Charles, 2001. "When Does Capital Account Liberalization Help More Than it Hurts?," CEPR Discussion Papers 2910, C.E.P.R. Discussion Papers.
  19. Marco Terrones & Eswar S Prasad & Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  20. Ventura, Jaume, 2005. "A Global View of Economic Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 22, pages 1419-1497 Elsevier.
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  24. Avinash Dixit, 2005. "Trade And Insurance With Imperfectly Observed Outcomes," World Scientific Book Chapters, in: An Inframarginal Approach To Trade Theory, chapter 5, pages 75-84 World Scientific Publishing Co. Pte. Ltd..
  25. Patrick J. Kehoe & Fabrizio Perri, 2000. "International business cycles with endogenous incomplete markets," Staff Report 265, Federal Reserve Bank of Minneapolis.
  26. Ayhan Kose & Marco Terrones & Eswar S Prasad, 2003. "Volatility and Comovement in a Globalized World Economy; An Empirical Exploration," IMF Working Papers 03/246, International Monetary Fund.
  27. Ayhan Kose & Kenneth Rogoff & Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  28. David M. G. Newbery & Joseph E. Stiglitz, 1984. "Pareto Inferior Trade," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 1-12.
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