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Pooling risk among countries

Mike Callen, Jean Imbs () and Paolo Mauro ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Suppose that international sharing risk—worldwide or with large numbers of countries—were costly. How much risk-sharing could be gained in small sets (or “pools”) of countries? To answer this question, we compute the means and variances of poolwide gross domestic product growth, for all possible pools of any size drawn from a sample of 74 countries, and compare them with the means and variances of consumption growth in each country individually. From the difference, we infer potential diversification and welfare gains. As much as two-thirds of the first best, full worldwide welfare gains can be obtained in groupings of as few as seven countries. The largest potential gains arise from pools consisting of countries in different regions and including countries with weak institutions. We argue that international risk-sharing fails to emerge because the largest potential gains are among countries that do not trust each other's willingness and ability to abide by international contractual obligations.

Keywords: risk sharing; diversification; growth-indexation; GDP-indexed instruments (search for similar items in EconPapers)
JEL-codes: E21 E32 F41 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2015-05
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Published in Journal of International Economics, May, 2015, 96(1), pp. 88-99. ISSN: 0022-1996

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http://eprints.lse.ac.uk/102909/ Open access version. (application/pdf)

Related works:
Journal Article: Pooling risk among countries (2015) Downloads
Working Paper: Pooling risk among countries (2015)
Working Paper: Pooling risk among countries (2015)
Working Paper: Pooling risk among countries (2015)
Working Paper: Pooling risk among countries (2015)
Working Paper: Pooling Risk Among Countries (2007) Downloads
Working Paper: Pooling Risk Among Countries (2007) Downloads
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