International Risk Sharing and Wealth Allocation with Higher Order Cumulants

Abstract

We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade— benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices.