Working Paper: CEPR ID: DP2691
Authors: Sylvester Eijffinger; Wolf Wagner
Abstract: We argue that since there are several impediments to international risk sharing, the welfare gains from full international risk sharing, which have been the object of analysis in the previous literature, are not suggestive. Instead, we study the gains from feasible risk sharing and find that they are considerable (0.5% increase in permanent consumption). Marginal benefits from further risk sharing are low, which indicates that feasible risk sharing can achieve most of the benefits from international risk sharing. Surprisingly, we find that sharing short-term consumption risk lowers welfare. On the basis of the results we make suggestions on how to improve existing international risk sharing systems.
Keywords: international risk sharing; welfare gains
JEL Codes: F40; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| feasible risk sharing (G22) | increase in permanent consumption (E21) |
| short-term consumption risk sharing (D15) | welfare losses (D69) |
| country at consumption trough shares risk with country at peak (E21) | exacerbation of consumption fluctuations (E32) |
| exacerbation of consumption fluctuations (E32) | lower welfare for both parties (D69) |