Working Paper: CEPR ID: DP5820
Authors: Fernando A. 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 effect 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.
Keywords: Domestic Markets; Globalization; International Markets; Risk Sharing; Sovereign Risk
JEL Codes: F34; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Globalization (F60) | Opening new goods markets (D40) |
| Globalization (F60) | Raising welfare (I38) |
| Globalization (F60) | Closure of some asset markets (G19) |
| Closure of some asset markets (G19) | Negative effect on risk sharing (D81) |
| Closure of some asset markets (G19) | Negative effect on welfare (I38) |
| Inability to enforce payments (G33) | Increased temptation for governments to default (H74) |
| Increased temptation for governments to default (H74) | Reduced international sharing (H87) |
| Globalization (F60) | Trade-off in risk sharing (D81) |