World Income Components: Measuring and Exploiting Risk-Sharing Opportunities
- (pp. 1031-1054)
AbstractA method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950-92.
Citation2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities." American Economic Review, 91(4): 1031-1054. DOI: 10.1257/aer.91.4.1031
- F40 Macroeconomic Aspects of International Trade and Finance: General
- G15 International Financial Markets