World Income Components: Measuring and Exploiting Risk-Sharing Opportunities
Stefano G. Athanasoulis, Robert J. Shiller
American Economic Review · 2001 · Volume 91 · Issue 4
Abstract
A 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.
Keywords
Macroeconomic Aspects of International Trade and Finance: General, International Financial Markets
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