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Financial Globalization and Real Regionalization

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Author Info
Heathcote, Jonathan
Perri, Fabrizio

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Abstract

Over the period 1972-86, the correlations of GDP, employment and investment between the United States and an aggregate of Europe, Canada and Japan were respectively 0.76, 0.66 and 0.63. For the period 1986 to 2000 the same correlations were much lower: 0.26, 0.03, and -0.07 (real regionalization). At the same time, US international asset trade has significantly increased. For example, between 1972-99, United States gross FDI and equity assets in the same group of countries rose from 4 to 23% of the US capital stock (financial globalization). We document that the correlation of real shocks between the US and the rest of the world has declined. We then present a model in which international financial market integration occurs endogenously in response to less correlated shocks. Financial integration further reduces international correlations in GDP and factor supplies. We find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3268.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3268

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Related research
Keywords: international business cycles international diversification

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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  6. Arvanitis, Athanasios V & Mikkola, Anne, 1996. "Asset-Market Structure and International Trade Dynamics," American Economic Review, American Economic Association, vol. 86(2), pages 67-70, May. [Downloadable!] (restricted)
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  9. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
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  10. Gian Maria Milesi-Ferretti & Philip R. Lane, 1999. "The External Wealth of Nations - Measures of Foreign Assets and Liabilities for Industrial and Developing Countries," IMF Working Papers 99/115, International Monetary Fund.
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  11. Robert F. Engle, 2000. "Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models," University of California at San Diego, Economics Working Paper Series 2000-09, Department of Economics, UC San Diego. [Downloadable!]
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  13. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November. [Downloadable!] (restricted)
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  14. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April. [Downloadable!] (restricted)
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  15. Kollmann, Robert, 2004. "Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics," CEPR Discussion Papers 4487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Salim M. Darbar & Parha Deb, 1999. "Linkages Among Asset Markets in the United States - Tests in a Bivariate GARCH Framework," IMF Working Papers 99/158, International Monetary Fund.
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  18. 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. [Downloadable!] (restricted)
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