Pooling Risk Among Countries

Jean Imbs and Paolo Mauro

No 2007/132, IMF Working Papers from International Monetary Fund

Abstract: In this paper, we identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing can amount to one order of magnitude larger than Lucas's classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Large welfare gains can only be achieved within groups where contracts are probably seen as relatively difficult to enforce. International diversification can thus yield substantial gains, but these may remain untapped owing to potential partners' weak institutional quality and a history of default on international obligations. Noting that existing risk sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis.

Keywords: WP; growth rate; exchange rate; welfare gain; A. risk sharing; diversification benefit; risk-sharing gain; pooling gain; Poolwide growth; Emerging and frontier financial markets; Income; Exchange rates; Financial integration; Trade integration; Global (search for similar items in EconPapers)
Pages: 50
Date: 2007-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=21005 (application/pdf)

Related works:
Journal Article: 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 (2015)
Working Paper: Pooling Risk Among Countries (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2007/132

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().