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Consider two economies: those of the Czech Republic and France. The Czech Republic and France each experience an EU-wide recession. France and The Czech Republic

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Consider two economies: those of the Czech Republic and France. The Czech Republic and France each experience an EU-wide recession. France and The Czech Republic can trade claims to capital income to better smooth consumption through the recession. There is no opportunity for risk diversification through capital asset trade, because the crisis is symmetric. France and the Czech Republic should each own 100% of their portfolios in foreign assets to smooth consumption

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