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Financial Globalization and Real Regionalization

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Over the period 1972-1986, the U.S. business cycle was strongly correlated with the business cycle in the rest of the industrialized world. Over the period 1986-2000, international co-movement was much weaker (real regionalization). At the same time, U.S. international asset trade has increased significantly (financial globalization). We first document these phenomena in detail and then argue that they are related. In particular, we present a model in which financial globalization occurs endogenously in response to less correlated real shocks. Financial globalization, by enhancing cross-border capital flows, further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and the endogenous change in international financial markets are needed to quantitatively account for the observed changes in the international business cycle.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-20.

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Date of creation: 03 Sep 2003
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Handle: RePEc:geo:guwopa:gueconwpa~03-03-20

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
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Web page: http://econ.georgetown.edu/

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Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
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Web: http://econ.georgetown.edu/

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Keywords: International business cycles; International diversification; Financial integration; Comovement;

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References

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  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  2. Cantor, Richard & Mark, Nelson C, 1988. "The International Transmission of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 493-507, August.
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  16. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
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  18. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
  19. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  20. Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc.
  21. Gian-Maria Milesi-Ferretti & Philip R. Lane, 1999. "The External Wealth of Nations," IMF Working Papers 99/115, International Monetary Fund.
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  1. Banking globalization and international business cycles
    by Christian Zimmermann in NEP-DGE blog on 2010-09-15 20:26:15
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