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Business Cycles and the Asset Structure of Foreign Trade

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  • Baxter, Marianne
  • Crucini, Mario J

Abstract

International financial markets are widely believed to be important for the international transmission of business cycles since they determine the extent to which individuals can smooth consumption in the presence of country-specific shocks to income. Using a two-country equilibrium model with restricted asset trade, the authors find that the absence of complete financial integration may not be important if shocks to national economies have low persistence or are transmitted rapidly across countries. However, if shocks are highly persistent or are not transmitted internationally, the extent of financial integration is central to the international transmission of business cycles. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 36 (1995)
Issue (Month): 4 (November)
Pages: 821-54

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Handle: RePEc:ier:iecrev:v:36:y:1995:i:4:p:821-54

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  1. Stockman, Alan C. & Svensson, Lars E. O., 1987. "Capital flows, investment, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 171-201, March.
  2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  3. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  4. Baxter, M., 1988. "Approximating Suboptimal Dynamic Equilibria: An Euler Equation Approach," RCER Working Papers 139, University of Rochester - Center for Economic Research (RCER).
  5. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-96, December.
  6. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers 245, University of Rochester - Center for Economic Research (RCER).
  7. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December.
  8. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  9. Harold L. Cole & Maurice Obstfeld, 1991. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
  10. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
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