Globalization and risk sharing

Fernando Broner and Jaume Ventura

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the effects of globalization on risk sharing and welfare. Like previous literature, we assume that countries cannot commit to repay their debts. Unlike previous literature, we assume that countries cannot discriminate between domestic and foreign creditors when repaying their debts. This creates novel interactions between domestic and international trade in assets. (i) Increases in domestic trade raise the bene.ts of enforcement and facilitate international trade. In fact, in our setup countries can obtain international risk sharing even in the absence of default penalties. (ii) Increases in foreign trade .i.e. globalization.raise the costs of enforcement and hamper domestic trade. As a result, globalization may worsen domestic risk sharing and lower welfare. We show how these e¤ects depend on various characteristics of tradable goods and explore the roles of borrowing limits, debt renegotiations, and trade policy.

Keywords: Globalization; risk sharing; sovereign risk; domestic markets; international markets (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 (search for similar items in EconPapers)
Date: 2005-10, Revised 2009-04
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Working Paper: Globalization and Risk Sharing (2015)
Journal Article: Globalization and Risk Sharing (2011)
Working Paper: Globalization and Risk Sharing (2006)
Working Paper: Globalization and Risk Sharing (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:837

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