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International Risk Sharing and Wealth Allocation with Higher Order Cumulants (Corsetti et al.)

International Risk Sharing and Wealth Allocation with Higher Order Cumulants by Giancarlo Corsetti, Anna Lipińska, Giovanni Lombardo published by BIS (9/2025).

We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains.

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