Corsetti, G., Lipińska, A., Lombardo, G.
International Risk Sharing and Wealth Allocation with Higher Order Cumulants
CWPE2446
Abstract: We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade— benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices.
Keywords: Asymmetries in Risk, Consumption Smoothing, Gains from Risk Sharing, Tail risk, Terms of Trade, Wealth Transfers
JEL Codes: F15 F41 G15
Author links: Giancarlo Corsetti
PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2446.pdf
Online Appendix: /research-files/docs/online_appendix_final_cwpe2446.pdf
Keynes Fund Project(s):
Disaster Risk, Asset Prices and the Macroeconomy (JHUX)