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Financial Intermediation, International Risk Sharing, and Reserve Currencies

Matteo Maggiori ()

No 146, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. The country that has the most developed financial sector takes on a larger proportion of global fundamental and financial risk because its financial intermediaries are better able to deal with funding problems following negative shocks. This asymmetric risk sharing has real consequences. In good times, and in the long run, the more financially developed country consumes more, relative to other countries, and runs a trade deficit financed by the higher financial income that it earns as compensation for taking greater risk. During global crises, it suffers heavier capital losses than other countries, exacerbating its fall in consumption. This country's currency emerges as the world's reserve currency because it appreciates during crises and so provides a good hedge. The model is able to rationalize these facts, which characterize the role of the US as the key country in the global financial architecture.

New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
Date: 2012
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Related works:
Journal Article: Financial Intermediation, International Risk Sharing, and Reserve Currencies (2017) Downloads
Working Paper: Financial Intermediation, International Risk Sharing, and Reserve Currencies (2013) Downloads
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More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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