Sharing asymmetric tail risk: smoothing, asset pricing and terms of trade -BIS.ppt
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1、BIS Working PapersNo 958Sharing asymmetric tail risk:Smoothing,asset pricingand terms of tradeby Giancarlo Corsetti,Anna Lipiska andGiovanni LombardoMonetary and Economic DepartmentAugust 2021JEL classification:F15,F41,G15.Keywords:international risk sharing,asymmetry,fattails,welfare.BIS Working Pa
2、pers are written by members of the Monetary and EconomicDepartment of the Bank for International Settlements,and from time to time by othereconomists,and are published by the Bank.The papers are on subjects of topicalinterest and are technical in character.The views expressed in them are those of th
3、eirauthors and not necessarily the views of the BIS.This publication is available on the BIS website(www.bis.org).Bank for International Settlements 2021.All rights reserved.Brief excerpts may bereproduced or translated provided the source is stated.ISSN 1020-0959(print)ISSN 1682-7678(online)Sharing
4、 Asymmetric Tail Risk:Smoothing,Asset Pricing and Terms of TradeGiancarlo CorsettiAnna LipinskaAugust 10,2021Giovanni LombardoAbstractCrises and tail events have asymmetric effects across borders,raising thevalue of arrangements improving insurance of macroeconomic risk.Using a two-country DSGE mode
5、l,we provide an analytical and quantitative analysis of thechannels through which countries gain from sharing(tail)risk.Riskier countriesgain in smoother consumption but lose in relative wealth and average consump-tion.Safer countries benefit from higher wealth and better average terms oftrade.Calib
6、rated using the empirical distribution of moments of GDP-growthacross countries,the model suggests significant quantitative effects.We offer analgorithm for the correct solution of the equilibrium using DSGE models undercomplete markets,at higher order of approximation.Keywords:International Risk Sh
7、aring,Asymmetry,Fat Tails,Welfare.JEL Classification:F15,F41,G15.University of Cambridge and CEPR.International Finance Division,Federal Reserve Board.Bank for International Settlements and University of Basel.The views expressed in this paper do not necessarily reflect the views of the BIS and of t
8、he USFederal Reserve System.We thank Fernando Alvarez for an insightful discussion.Giancarlo Corsettigratefully acknowledges the generous support and hospitality of the BIS when working on the firstdraft of this paper.Corsettis work on this paper is part of the project“Disaster Risk,Asset Pricesand
9、the Macroeconomy”(JHUX)sponsored by the Keynes Fund at Cambridge University.1 IntroductionThe Global Financial Crisis,the sovereign risk crisis in the euro-area,the early ef-fects of the looming Climate Change and more recently the COVID-19 pandemic haveprogressively exposed the lack of resilience o
10、f the global economy to large financialand macroeconomic distress and disasters.Policymakers around the world are bracingfor a new global environment with heightened tail riskthe risk of rare but disrup-tive events.Agents perceptions of tail risk may hinder economic recovery from largedisturbances(B
11、aker et al.,2020),or even weigh on long-term growth prospects(Ko-zlowski et al.,2020).While the recent large crises have a strong global component,it has become increasingly clear that regions and countries have a very different ex-posure to disaster shocks.Global crises and tail events transmit qui
12、te asymmetricallyacross borders,widening the international divide in wealth and welfare.Hence tail risk,even when associated to global disturbances,raises the value of international risk shar-ing,achievable either through capital market development and integration,or throughinstitutional arrangement
13、s.In the context of heightened perception of tail risk,risk sharing arrangementsat global level are seen as highly desirable as they give regions and countries oppor-tunities for smoothing consumption and moderate the costs of adjustment to adverseshocks.However,insuring disaster risk has potentiall
14、y significant macroeconomic andfinancial implications.For any given distribution of fundamentals,going from a lowto a high degree of risk insurance changes the equilibrium valuation of national assets.Any change in asset pricing in turn translates into an equilibrium adjustment in rel-ative wealth a
15、nd demand,possibly leading to a re-allocation of labor and productionacross regions and countries.This means that insurance may also affect trade and theinternational prices of goods.In this paper,we study the joint financial,macroeconomic and welfare im-plications of enhancing risk sharing in the p
16、resence of disaster risk.In the traditionof open macroeconomics,we focus on GDP fluctuations as the fundamental source ofmacroeconomic risk.Drawing on financial theory and asset pricing,we bring forwardthe analysis of kurtosis and skewness,in addition to variance,in the distribution ofthe variable u
17、nderlying macroeconomic risk.Relative to the literature,we explicitlyaccount for cross-border heterogeneity in both second and higher moments of the dis-tribution of national GDP.For analytical clarity and tractability,we focus our analysisby contrasting the extreme cases of financial autarky(no rol
18、e for insurance via finan-cial markets)to complete markets(perfect insurance).1 We carry out our analysis1This guarantees that,in the absence of economic distortions,trade in financial assets will unam-1both analytically and numerically,setting parameters based on evidence on the GDPdistribution acr
19、oss countries.To motivate our analysis,we present a set of stylized facts on the variance,kurtosis and the skewness of output for a large sample of countries.We show that,first,there is substantial heterogeneity in these moments across countries.Second,thevariance of output is positively correlated
20、with kurtosis but negatively correlated toskewness.As one would expect,especially in light of the past decades of data,highervolatility of output is associated with higher frequency of large downturns.Our theoretical contribution is threefold.First,we offer a novel decompositionof the gains from ris
21、k sharing into a“smoothing effect”(SE)and a“level effect”(LE).The former captures welfare gains from risk diversification in terms of the distributionof marginal utility growth.The latter synthesizes welfare gains or losses through theaverage consumption of goods and leisure.These in turn materializ
22、e via interrelatedchannels.The relative wealth channel works via the revaluation of a country assets,including physical,financial and human capital,at the equilibrium prices with perfectinsurance(relative to imperfect insurance).Asset prices reflect any adjustment notonly in the equilibrium discount
23、 factor,but also in the(average)international price of acountrys output the good price channel associated to the equilibrium reallocationof production and demand.We specifically highlight the terms of trade as a novelchannel by which perfect insurance may affect social welfare:for a given relative w
24、ealth,the country experiencing an improvement in its average terms of trade gains in higherconsumption and lower labor effort.An important advantage of our decompositionconsists of clarifying how varying the relative riskiness of national GDPs may move thesmoothing and level effects(SE and LE)in opp
25、osite directions.Riskier countries gain interms of smoother consumption and labor,but lose out in terms of average consumptionand labor effort.Instead,safer countries benefit from higher average consumption andlower labor effort in excess of possible smoothing losses.Our decomposition maps thesemove
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