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Risksharing within the United States: what have financial markets and fiscal federalism accomplished?
We document aggregate income growth uncertainty at the state level, and the extent to which this uncertainty is reduced by risksharing through financial markets and federal fiscal policy. A methodology is adopted that is closely connected to the empirical growth literature. It does not rely on assumptions about a model or stochastic process of income. This is important because estimated gains from international risksharing have been found to be very sensitive to the assumed model or income process. We only make assumptions about the information set used to predict growth, which is sufficient ...
Macro markets and financial security
Uncertainty about national income growth poses significant macroeconomic risk to households all over the world. To help reduce investors' exposure, researchers have proposed a controversial new set of security markets called macro markets. These international markets would trade long-term claims on the income of an entire country or region. For example, in a macro market for the United States, an investor could buy a claim on the U.S. national income and then receive dividends equal to a fraction of national income for as long as the claim is held. Although many barriers stand in the way of ...
Growth uncertainty and risksharing
We propose a new methodology to evaluate the gains from global risksharing that is closely connected to the empirical growth literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific deviations from world growth on a wide set of variables in the information set. Since this residual risk can be entirely hedged, we use it to obtain a measure of welfare gain that can be achieved by a representative country. We find that nations can reap very large benefits from engaging in such risksharing arrangements. Using post-war data, the ...