International risk sharing and wealth allocation with higher order cumulants

Giancarlo Corsetti, Anna Lipinska and Giovanni Lombardo

No 1293, BIS Working Papers from Bank for International Settlements

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: 2025-10
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