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Financial Integration, Macroeconomic Volatility and Welfare

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Abstract

This paper studies the effects of financial integration on macroeconomic volatility and welfare. We examine a two-sector (tradable and nontradable), twocountry world economy with production in which both stocks and bonds are traded internationally, but markets are incomplete. The effects of integration are examined by comparing the equilibrium properties of the model under three financial configurations: autarky, low integration and high integration. The model predicts a non-monotonic relationship between the degree of financial integration and the volatility of several macroeconomic variables. Greater integration is initially associated with more volatile consumption and output, but as integration proceeds further volatility declines. We also find that while increased integration allows for significantly greater risk-sharing between countries, the improvement in welfare can be very small. Classification-JEL Codes: D52; F36; G11

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Bibliographic Info

Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~06-06-13.

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Date of creation: 13 Jun 2006
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Handle: RePEc:geo:guwopa:gueconwpa~06-06-13

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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: Globalization; Incomplete Markets; Volatility; Welfare;

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References

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  1. Asli Leblebicioglu, 2006. "Financial Integration, Credit Market Imperfections and Consumption Smoothing," 2006 Meeting Papers 651, Society for Economic Dynamics.
  2. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc.
  3. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
  4. Jinill Kim and Sunghyun Henry Kim, 2001. "Spurious Welfare Reversals in International Business Cycle Models," Computing in Economics and Finance 2001 3, Society for Computational Economics.
  5. Buch, Claudia M. & Pierdzioch, Christian, 2005. "The integration of imperfect financial markets: Implications for business cycle volatility," Journal of Policy Modeling, Elsevier, vol. 27(7), pages 789-804, October.
  6. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  7. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  8. Sutherland, Alan, 1996. " Financial Market Integration and Macroeconomic Volatility," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 521-39, December.
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Citations

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Cited by:
  1. Jappelli, Tullio & Pagano, Marco, 2008. "Financial market integration under EMU," CFS Working Paper Series 2008/33, Center for Financial Studies (CFS).
  2. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York.
  3. Atanas Christev & Jacques Melitz, 2011. "EMU, EU, Market Integration and Consumption Smoothing," Working Papers 2011-21, CEPII research center.
  4. Pariwat Kanithasen & Vacharakoon Jivakanont & Charnon Boonnuch, 2011. "AEC 2015: Ambitions, Expectations and Challenges ASEAN's Path towards Greater Economic and Financial Integration," Working Papers 2011-03, Economic Research Department, Bank of Thailand.
  5. Coeurdacier, Nicolas & Rey, Hélène, 2012. "Home Bias in Open Economy Financial Macroeconomics," CEPR Discussion Papers 8746, C.E.P.R. Discussion Papers.
  6. Martin D D Evans & Viktoria Hnatkovska, 2006. "International Capital Flows Returns and World Financial Integration," 2006 Meeting Papers 60, Society for Economic Dynamics.
  7. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
  8. Atanas CHRISTEV & Jacques MELITZ, 2010. "EMU, EU, Capital Market Integration and Consumption Smoothing," Working Papers 2010-06, Centre de Recherche en Economie et Statistique.

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