Globalization and Risk Sharing
Fernando A. Broner
CREI; Universitat Pompeu Fabra; Barcelona GSE; CEPR
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 5820
This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual and exogenous increase in the fraction of goods that are tradable. In the absence of frictions, globalization opens new goods markets and raises welfare. We assume, however, that countries cannot commit to pay their debts. Unlike the previous literature, and motivated by changes in the institutional setup of emerging-market borrowing, we also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. Although globalization still opens new goods markets, we find that it can also open or close some asset markets. The net effect on risk sharing and welfare of this process of creation and destruction of markets might be either positive or negative depending on a variety of factors that the theory highlights.
Number of Pages in PDF File: 49
Keywords: Globalization, risk sharing, sovereign risk, domestic markets, international markets
JEL Classification: F34, F36, G15working papers series
Date posted: October 13, 2006
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