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Sharing Asymmetric Tail Risk: Smoothing, Asset Prices and Terms of Trade

Giancarlo Corsetti, Anna Lipinska and Giovanni Lombardo

No 1324, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests non-negligible quantitative effects. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation.

Keywords: International risk sharing; Asymmetry; Fat tails; Welfare (search for similar items in EconPapers)
JEL-codes: F15 F41 G15 (search for similar items in EconPapers)
Date: 2021-08-06
New Economics Papers: this item is included in nep-dge, nep-int, nep-isf, nep-opm, nep-ore and nep-rmg
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DOI: 10.17016/IFDP.2021.1324

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