Commodity trade and international risk sharing

This paper evaluates the social gains from international risk sharing in some simple general-equilibrium models with output uncertainty. A simulation model calibrated to selected moments of U.S. and Japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0.20 percent of output per year. Even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology. The paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility.