Geoeconomic Fragmentation and International Diversification Benefits

Download or read book Geoeconomic Fragmentation and International Diversification Benefits written by Tatsushi Okuda and published by International Monetary Fund. This book was released on 2024-03-08 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.