Financial Intermediation, International Risk Sharing, and Reserve Currencies

I model the equilibrium risk sharing between countries with varying financial development The most financially developed country takes greater risks because its financial intermediaries deal with funding problems better. In good times, the more financially developed country consumes more and runs a...

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Bibliographic Details
Published in:The American economic review Vol. 107; no. 10; pp. 3038 - 3071
Main Author: Maggiori, Matteo
Format: Journal Article
Language:English
Published: Nashville American Economic Association 01.10.2017
Subjects:
Compensation
Crises
Currency
Developed countries
Economic crisis
Economic development
Economic models
Financial intermediaries
Financial liabilities
Financiers
International finance
International trade
Investment risk
Money
Net worth
Public debt
Reserve currencies
Risk
Risk sharing
Sharing
Spreading risk
Wealth
ISSN:0002-8282, 1944-7981
Online Access:Get full text
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Summary:I model the equilibrium risk sharing between countries with varying financial development The most financially developed country takes greater risks because its financial intermediaries deal with funding problems better. In good times, the more financially developed country consumes more and runs a trade deficit financed by the higher financial income that it earns as compensation for taking greater risk. During global crises, it suffers heavier losses. Its currency emerges as the reserve currency because it appreciates during crises, thus providing a good hedge. I provide evidence that financial net worth plays a crucial role in understanding this asymmetric risk sharing.
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20130479