Risk Aversion and Optimal Trade Dependency

This paper shows that a highly indebted country's (HIC) optimal dependency on international trade depends on the country's degree of risk aversion. Risk aversion affects optimal trade dependency directly through consumption smoothing across different states of the world (intratemporally) and indirectly through consumption smoothing across different time periods (intertemporally). When the probability of default is high (low) and the interest rate on consumption borrowing is large (small) relatively to the discount rate, optimal openness to international trade increases (decreases) with risk aversion while optimal consumption borrowing decreases (increases). Otherwise, results are uncertain.