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Inefficient international risk-sharing

Author

Listed:
  • Cho, Daeha
  • Kim, Kwang Hwan
  • Kim, Suk Joon
Abstract
Complete financial markets are widely believed to be beneficial for the international economy, since they enable cross-country risk-sharing. Using a two-country New Keynesian model, we show that this is not the case if the source of income fluctuations is a country-specific markup shock. When preferences involve the wealth effect on labor supply and imply that Home and Foreign goods are Edgeworth substitutes, the absence of risk-sharing in autarky acts like a favorable markup shock, reducing the variability of relative inflation and output gaps created by the shock. Thus, welfare can be higher under autarky than under complete financial markets, indicating that international risk-sharing can be undesirable. However, if the wealth effect on labor supply is absent or Home and Foreign goods are Edgeworth complements, welfare reversals do not occur.

Suggested Citation

  • Cho, Daeha & Kim, Kwang Hwan & Kim, Suk Joon, 2023. "Inefficient international risk-sharing," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 31-49.
    • Handle: RePEc:eee:moneco:v:138:y:2023:i:c:p:31-49
    DOI: 10.1016/j.jmoneco.2023.04.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Nominal rigidities; Risk-sharing; Autarky; Wealth effect; Welfare losses;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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