Template-Type: ReDIF-Paper 1.0
Author-Name: Giancarlo Corsetti
Author-X-Name-First: Giancarlo
Author-X-Name-Last: Corsetti
Author-Name: Anna Lipínska
Author-X-Name-First: Anna
Author-X-Name-Last: Lipínska
Author-Name: Giovanni Lombardo
Author-X-Name-First: Giovanni
Author-X-Name-Last: Lombardo
Title: Sharing asymmetric tail risk smoothing, asset pricing and terms of trade
Abstract: Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests significant quantitative effects. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation.
Length: 59 pages
Creation-Date: 2021-08
File-URL: https://www.bis.org/publ/work958.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work958.htm
File-Format: text/html
Number: 958
Keywords: international risk sharing, asymmetry, fat tails, welfare
Classification-JEL: F15, F41, G15
Handle: RePEc:bis:biswps:958