International Risk Sharing and Wealth Allocation with Higher Order Cumulants

Giancarlo Corsetti, Anna Lipińska and Giovanni Lombardo

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains.

Keywords: Asymmetries in Risk; Openness; Country Size; Tail Risk; Gains from Risk Sharing; Consumption Smoothing; Terms of Trade; Wealth Transfers (search for similar items in EconPapers)
JEL-codes: F15 F41 G15 (search for similar items in EconPapers)
Date: 2024-08-08
New Economics Papers: this item is included in nep-ifn
Note: gc422
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Related works:
Working Paper: International Risk Sharing and Wealth Allocation with Higher Order Cumulants (2024)
Working Paper: International Risk Sharing and Wealth Allocation with Higher Order Cumulants (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2446

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