American Economic Review Vol. 84 No. 5 1994
Risk-Taking, Global Diversification, and Growth
Abstract
This paper develops a continuous-time stochastic model in which international risk-sharing can yield substantial welfare gains through its effect on expected consumption growth. The mechanism linking global diversification to growth is an attendant world portfolio shift from safe low-yield capital to riskier high-yield capital. The presence of these two types of capital captures the idea that growth depends on the availability of an ever-increasing array of specialized, hence inherently risky, production inputs. Calibration exercises using consumption and stock-market data imply that most countries reap large steady-state welfare gains from global financial integration.
- Volume
- 84
- Issue
- 5
- Pages
- 1310-1329
- Sources
- bibtex:phds-export.bib