Working Paper: CEPR ID: DP16443
Authors: Giancarlo Corsetti; Anna Lipinska; Giovanni Lombardo
Abstract: Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests significant quantitative effects. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation.
Keywords: international risk sharing; asymmetry; fat tails; welfare
JEL Codes: F15; F41; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk sharing (D16) | consumption smoothing (D15) |
| risk sharing (D16) | average consumption (D10) |
| risk sharing (D16) | relative wealth (D31) |
| risk sharing (D16) | terms of trade (F14) |
| risk sharing (D16) | asset prices (G19) |
| higher moments (C69) | asset pricing (G19) |
| risk sharing (D16) | transmission of output risk (F16) |
| riskier countries (F34) | relative gain advantage from risk sharing (D81) |