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Geoeconomic Fragmentation and International Diversification Benefits
Author:
Tatsushi Okuda
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Tomohiro Tsuruga
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Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 048
Language:
English
Publication Date:
08 Mar 2024
DOI:
https://doi.org/10.5089/9798400269530.001
ISBN:
9798400269530
ISSN:
1018-5941
Pages:
50
Keywords:
Geopolitical risk; financial integration; international risk sharing; diversification benefit; output volatility; volatility of Macro-Financial Variables; simulation result; investment efficiency process; Total factor productivity; Business cycles; Consumption; International capital markets; Output gap; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper applies the two-country open-economy model with trade in stocks and bonds of Coeurdacier et al. (2010) to quantify the loss of international diversification benefits for major advanced economies, which have a significant presence in international financial markets, under geoeconomic fragmentation. We perform counterfactual simulations under different hypothetical fragmentation scenarios in which these economies are unable to trade with geopolitically distant countries, as measured by voting disagreement on foreign policy issues at the United Nations General Assembly meetings during 2012-2021. The simulation results imply a potentially significant loss of international diversification benefits of financial openness for the considered advanced economies by limiting trading to partner countries that are geopolitical allies with highly synchronized business cycles.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund