Risk-Taking, Global Diversification, and Growth

41 Pages Posted: 24 Jul 2007 Last revised: 12 Sep 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

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

Date Written: June 1992

Abstract

This paper develops a dynamic continuous-time model in which international risk sharing can yield substantial welfare gains through its positive effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe, but low-yield, capital into riskier, high-yield capital. The presence of these two types of capital is meant to capture the idea that growth depends on the availability of an ever-increasing array of specialized, hence inherently risky, production inputs. A partial calibration exercise based on Penn World Table consumption data implies steady-state welfare gains from global financial integration that for some regions amount to several times initial wealth.

Suggested Citation

Obstfeld, Maurice, Risk-Taking, Global Diversification, and Growth (June 1992). NBER Working Paper No. w4093. Available at SSRN: https://ssrn.com/abstract=382144

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