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Pooling risk among countries

Callen, Mike, Imbs, Jean and Mauro, Paolo (2015) Pooling risk among countries. Journal of International Economics, 96 (1). pp. 88-99. ISSN 0022-1996

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Identification Number: 10.1016/j.jinteco.2015.01.006

Abstract

Suppose that international sharing risk—worldwide or with large numbers of countries—were costly. How much risk-sharing could be gained in small sets (or “pools”) of countries? To answer this question, we compute the means and variances of poolwide gross domestic product growth, for all possible pools of any size drawn from a sample of 74 countries, and compare them with the means and variances of consumption growth in each country individually. From the difference, we infer potential diversification and welfare gains. As much as two-thirds of the first best, full worldwide welfare gains can be obtained in groupings of as few as seven countries. The largest potential gains arise from pools consisting of countries in different regions and including countries with weak institutions. We argue that international risk-sharing fails to emerge because the largest potential gains are among countries that do not trust each other's willingness and ability to abide by international contractual obligations.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-i...
Additional Information: © 2015 Elsevier B.V.
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
J Political Science > JZ International relations
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited: 13 Dec 2019 11:42
Last Modified: 20 Jan 2020 07:10
URI: http://eprints.lse.ac.uk/id/eprint/102909

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