Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?

Harold Cole and Maurice Obstfeld

No 3027, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper evaluates the gains from international risk sharing in some simple general-equilibrium models with output uncertainty. Under empirically plausible calibration, the Incremental loss from a ban on international portfolio diversification is estimated to be quite small--0.15 percent of output per year is a representative figure. Even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology. The paper argues that the small magnitude of potential trade gains, when coupled with small costs of cross-border financial transactions, may explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility.

Date: 1989-07
Note: ITI IFM
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Published as Journal of Monetary Economics, Vol. 28, pp. 3-24, (1991).

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Journal Article: Commodity trade and international risk sharing: How much do financial markets matter? (1991)
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