Working Paper
International Risk-Sharing in a Fragmented World
Abstract: This paper studies how geopolitical risk shapes financial fragmentation and international risk-sharing, using bilateral official lending data from 1910 to 2024. We document that when geopolitical risk is high, bilateral lending increasingly follows geopolitical alignment. Because geopolitically aligned countries experience more synchronized shocks, this fragmentation limits the effectiveness of international risk-sharing. To rationalize these patterns, we introduce geopolitical considerations into a limited-commitment model of sovereign borrowing. The model shows that, even with non-discriminatory default, higher geopolitical tensions redirect international lending toward allied countries and weaken risk-sharing.
JEL Classification: F34; G01; H63;
https://doi.org/10.21034/wp.816
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Working Papers
Publication Date: 2026-06-30
Number: 816