Geoeconomic Fragmentation and International Diversification Benefits

Tatsushi Okuda and Tomohiro Tsuruga

No 2024/048, IMF Working Papers from International Monetary Fund

Abstract: This paper applies the two-country open-economy model with trade in stocks and bonds of Coeurdacier et al. (2010) to quantify the loss of international diversification benefits for major advanced economies, which have a significant presence in international financial markets, under geoeconomic fragmentation. We perform counterfactual simulations under different hypothetical fragmentation scenarios in which these economies are unable to trade with geopolitically distant countries, as measured by voting disagreement on foreign policy issues at the United Nations General Assembly meetings during 2012-2021. The simulation results imply a potentially significant loss of international diversification benefits of financial openness for the considered advanced economies by limiting trading to partner countries that are geopolitical allies with highly synchronized business cycles.

Keywords: Geopolitical risk; financial integration; international risk sharing; diversification benefit; output volatility; volatility of Macro-Financial Variables; simulation result; investment efficiency process; Total factor productivity; Business cycles; Consumption; International capital markets; Output gap; Global (search for similar items in EconPapers)
Pages: 50
Date: 2024-03-08
New Economics Papers: this item is included in nep-ifn, nep-int and nep-opm
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