The Short- and Long-Run Benefits of Financial Integration
American Economic Review, Papers and Proceedings, May 2010
5 Pages Posted: 4 Feb 2010
Date Written: February 3, 2010
Cole and Obstfeld (1991) pointed out that the welfare benefits of international portfolio diversification might be negligible. They obtain this result in the context of a model in which agents have time-additive constant relative risk aversion preferences. We revisit their conclusion by showing that a preference for the timing of the resolution of uncertainty combined with endowments containing a slowly moving trend can result in extremely high welfare gains.
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