International Risk-Sharing in a Fragmented World

Javier Bianchi, Sebastian Horn, Giovanni Russo and Cesar Sosa-Padilla

No 816, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: This paper studies how geopolitical risk shapes financial fragmentation and international risk-sharing, using bilateral official lending data from 1910 to 2024. We document that when geopolitical risk is high, bilateral lending increasingly follows geopolitical alignment. Because geopolitically aligned countries experience more synchronized shocks, this fragmentation limits the effectiveness of international risk-sharing. To rationalize these patterns, we introduce geopolitical considerations into a limited-commitment model of sovereign borrowing. The model shows that, even with non-discriminatory default, higher geopolitical tensions redirect international lending toward allied countries and weaken risk-sharing.

Keywords: Capital flows; Financial fragmentation; Official lending; Risk-sharing; Sovereign default; Geoeconomics (search for similar items in EconPapers)
JEL-codes: F34 G01 H63 (search for similar items in EconPapers)
Date: 2026-06-30
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Working Paper: International Risk-Sharing in a Fragmented World (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:103478

DOI: 10.21034/wp.816

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