Geoeconomic Fragmentation and International Diversification Benefits

March 8, 2024

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Tatsushi Okuda, and Tomohiro Tsuruga. Geoeconomic Fragmentation and International Diversification Benefits, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: 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.

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.

Subject: Business cycles, Consumption, Economic growth, Financial markets, International capital markets, National accounts, Output gap, Production, Total factor productivity

Keywords: Business cycles, Consumption, Diversification benefit, Financial integration, Geopolitical risk, Global, International capital markets, International risk sharing, Investment efficiency process, Output gap, Output volatility, Simulation result, Total factor productivity, Volatility of Macro-Financial Variables

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/048
Stock No:

WPIEA2024048
ISBN:

9798400269530
ISSN:

1018-5941

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