Geoeconomic Fragmentation and International Diversification Benefits
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Summary:
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.
Series:
Working Paper No. 2024/048
Subject:
Business cycles Consumption Economic growth Financial markets International capital markets National accounts Output gap Production Total factor productivity
Frequency:
regular
English
Publication Date:
March 8, 2024
ISBN/ISSN:
9798400269530/1018-5941
Stock No:
WPIEA2024048
Format:
Paper
Pages:
50
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