Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?

50 Pages Posted: 21 Dec 2000

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: July 1989

Abstract

This paper evaluates the gains from international risk sharing in some simple general-equilibrium models with output uncertainty. Under empirically plausible calibration, the Incremental loss from a ban on international portfolio diversification is estimated to be quite small--0.15 percent of output per year is a representative figure. Even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology. The paper argues that the small magnitude of potential trade gains, when coupled with small costs of cross-border financial transactions, may explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility.

Suggested Citation

Cole, Harold L. and Obstfeld, Maurice, Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter? (July 1989). NBER Working Paper No. w3027. Available at SSRN: https://ssrn.com/abstract=237146

Harold L. Cole (Contact Author)

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Maurice Obstfeld

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Peterson Institute for International Economics ( email )

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National Bureau of Economic Research ( email )

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Centre for Economic Policy Research ( email )

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