Abstract
We show that countries that take on more international risk are rewarded with higher expected consumption growth. International risk is defined as the beta of a country’s consumption growth with world consumption growth. High‐beta countries hold more foreign assets, as predicted by the theory. Despite the positive effects of beta, a country’s idiosyncratic volatility is negatively correlated with expected consumption growth. Therefore, uninsured shocks affect not only current growth, but also future consumption growth. High‐volatility countries have worse net foreign asset positions, suggesting that solvency constraints limit their future growth.
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