American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
World Income Components: Measuring and Exploiting Risk-Sharing Opportunities
American Economic Review
vol. 91,
no. 4, September 2001
(pp. 1031–1054)
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.Citation
Athanasoulis, Stefano, G., and Robert J. Shiller. 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities." American Economic Review, 91 (4): 1031–1054. DOI: 10.1257/aer.91.4.1031JEL Classification
- F40 Macroeconomic Aspects of International Trade and Finance: General
- G15 International Financial Markets