Abstract: (16 Views)
Based on the basic discussions of the behavior of economic agents, we know that with a concave utility function and a convex budget constraint, it is necessary to maximize inter-temporal utility, smoothing inter-temporal consumption because a risk-averse person is sensitive to consumption fluctuations. In a closed economy, impulses specific to that economy cause fluctuations in production and consumption, but the possibility of diversifying assets within the framework of a closed economy is limited. With the development of international financial markets, households can insure their consumption against country-specific impulses. According to the theory of international risk sharing, one of the benefits of global financial markets is the possibility of reducing volatility or consumption risk. This possibility is significant for countries that are exposed to exchange rate fluctuations. Many developing countries that rely on the production and export of raw goods are at risk of high volatility in real income, because the prices of these goods are very volatile and sometimes unpredictable. The reactions of production and national income in these countries to fluctuations in the price of raw materials are cyclical; A negative impulse in the exchange relationship causes economic stagnation and vice versa. Berka, Crocini, and Wang (2012) demonstrate this empirically using an extensive multi-country dataset.
Keywords: Risk sharing, interest rate
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