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Globalization and Risk Sharing

Author

Listed:
  • Fernando Broner
  • Jaume Ventura
Abstract
This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual and exogenous increase in the fraction of goods that are tradable. In the absence of frictions, globalization opens new goods markets and raises welfare. We assume, however, that countries cannot commit to pay their debts. Unlike the previous literature, and motivated by changes in the institutional setup of emerging-market borrowing, we also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. Although globalization still opens new goods markets, we find that it can also open or close some asset markets. The net e§ect on risk sharing and welfare of this process of creation and destruction of markets might be either positive or negative depending on a variety of factors that the theory highlights.

Suggested Citation

  • Fernando Broner & Jaume Ventura, 2006. "Globalization and Risk Sharing," Working Papers 307, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:307
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    References listed on IDEAS

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    More about this item

    Keywords

    globalization; risk sharing; sovereign risk; domestic markets; international markets;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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