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Financial Integration, Credit Market Imperfections and Consumption Smoothing

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  • Asli Leblebicioglu

    ()
    (Economics North Carolina State University)

Abstract

Recent empirical research by Kose, Prasad and Terrones (2003) shows that financial integration is associated with higher consumption volatility in developing countries. This paper provides one possible explanation as to how international financial integration can increase consumption volatility in a developing country facing credit market imperfections. I use a two country international real business cycle model where the non-traded sector in the small country faces borrowing constraints due to contract enforceability problems. Financial integration provides households insurance against domestic risks that are amplified by the financial imperfections. If the international risk-sharing opportunities are nonexistent, households can secure themselves only by adjusting their labor effort, which leads to changes in sectorial output and terms of trade. The deterioration of the terms of trade acts as a dampening effect on consumption, causing it to be less volatile under financial autarky relative to financial integration

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 651.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:651

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Keywords: international business cycles; financial integration;

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  1. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Growth Volatility and Financial Liberalization," NBER Working Papers 10560, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series 2665, CESifo Group Munich.
  2. Rudrani Bhattacharya & Ila Patnaik, 2013. "Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies," IMF Working Papers 13/120, International Monetary Fund.
  3. Bhattacharya, Rudrani & Patnaik, Ila, 2013. "Credit constraints, productivity shocks and consumption volatility in emerging economies," Working Papers 13/121, National Institute of Public Finance and Policy.
  4. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2009. "Financial Globalization and Economic Policies," CEPR Discussion Papers 7117, C.E.P.R. Discussion Papers.
  5. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197, June.
  6. Martin D. Evans & Viktoria V. Hnatkovska, 2007. "Financial Integration, Macroeconomic Volatility, and Welfare," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 500-508, 04-05.
  7. Quy-Toan Do & Andrei A. Levchenko & Martin Ravallion, 2013. "Trade Insulation as Social Protection," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
  8. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series 267, Central Bank of Brazil, Research Department.
  9. Eozenou, Patrick, 2008. "Financial Integration and Macroeconomic Volatility: Does Financial Development Matter?," MPRA Paper 12738, University Library of Munich, Germany.

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