International Risk Sharing and Wealth Allocation with Higher Order Cumulants

Giancarlo Corsetti, Anna Lipińska and Giovanni Lombardo

Janeway Institute Working Papers from Faculty of Economics, University of Cambridge

Abstract: We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade— benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices.

Keywords: Asymmetries in Risk; Consumption Smoothing; Gains from Risk Sharing; Tail risk; 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-fdg and nep-opm
Note: gc422
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2422

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