Working Paper: NBER ID: w12482
Authors: Fernando A. Broner; Jaume Ventura
Abstract: This paper presents a theoretical study of the e¤ects 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.
Keywords: Globalization; Risk Sharing; Welfare; Sovereign Risk
JEL Codes: E24; 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) | risk sharing (D16) |
| Globalization (F60) | welfare (I38) |
| Absence of commitment by governments (H11) | sovereign risk (F34) |
| sovereign risk (F34) | asset market openings (G10) |
| asset market openings (G10) | risk sharing (D16) |
| asset market openings (G10) | welfare (I38) |
| Globalization (F60) | fraction of goods shared internationally (F10) |
| fraction of goods shared internationally (F10) | welfare (I38) |
| Globalization (F60) | imperfect international sharing of goods (H87) |
| imperfect international sharing of goods (H87) | welfare (I38) |
| government enforcement policies (G18) | market incompleteness (D52) |