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The High Cross-Country Correlations of Prices and Interest Rates

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  • Espen Henriksen
  • Finn E. Kydland
  • Roman Sustek

Abstract

We introduce financial frictions in a two sector model of international trade with heterogeneous agents. The level of specialization in the economy (economic development) depends on the quality of financial institutions. Underdeveloped financial markets prohibit an economy to specialize in sectors where finance is important. Capital flows and international trade are complements when countries differ in the degree of development of their financial sectors. Capital flows to countries with more robust financial institutions which in turn allow their economies to develop sectors that are financially dependent.

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Bibliographic Info

Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 11/01.

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Handle: RePEc:not:notcfc:11/01

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Keywords: trade flows; capital flows; financial frictions; economic development.;

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References

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Citations

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Cited by:
  1. Sustek, Roman, 2009. "Monetary Business Cycle Accounting," MPRA Paper 17518, University Library of Munich, Germany.
  2. Raphael A. Auer & Aaron Mehrotra, 2014. "Trade Linkages and the Globalisation of Inflation in Asia and the Pacific," CESifo Working Paper Series, CESifo Group Munich 4769, CESifo Group Munich.
  3. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2010. "Some Problems in the Testing of DSGE Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7621, C.E.P.R. Discussion Papers.
  4. Joseph P. Byrne & Giorgio Fazio & Norbert Fiess, 2010. "Interest Rate Co-movements, Global Factors and the Long End of the Term Spread," Working Papers, Business School - Economics, University of Glasgow 2010_10, Business School - Economics, University of Glasgow.
  5. Saverio Simonelli & Haroon Mumtaz & Paolo Surico, 2009. "A Historical Perspective on International Co-movements: 1821-2007," 2009 Meeting Papers, Society for Economic Dynamics 523, Society for Economic Dynamics.
  6. Nannette Lindenberg & Frank Westermann, 2009. "Common Trends and Common Cycles among Interest Rates of the G7-Countries," Working Papers, Institute of Empirical Economic Research 77, Institute of Empirical Economic Research.
  7. Haroon Mumtaz & Saverio Simonelli & Paolo Surico, 2009. "International Comovements, Business Cycle and Inflation: a Historical Perspective," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 233, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. Vo Phuong Mai Le & Patrick Minford & Michael Wickens, 2009. " The ‘Puzzles’ Methodology: En Route to Indirect Inference?," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0903, Centre for Dynamic Macroeconomic Analysis.
  9. Sustek, Roman, 2010. "Monetary aggregates and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(4), pages 451-465, May.
  10. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2010. "Interest Rate Co-movements, Global Factors and the Long End of the Term Spread," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-24, Scottish Institute for Research in Economics (SIRE).
  11. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1471-1490.

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