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Business Cycles and the Asset Structure of Foreign Trade

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  • Baxter, M.
  • Crucini, M.

Abstract

International financial market linkages are widely believed to be important for the international transmission of business cycles, since these govern the extent to which individuals can smooth consumption in the presence of country-specific shocks to income. This paper develops a two-country, general equilibrium model with restricted asset trade and provides a detailed analysis of the channels through which these financial linkages affect international business cycles. Our central finding is that the absence of complete financial integration may not be important if the shocks to national economies are of low persistence, or are transmitted rapidly across countries over time. However, if shocks are highly persistent or are not transmitted internationally, the extent of financial integration is central to the international transmission of business cycles.

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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 316.

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Length: 35 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:roc:rocher:316

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: financial market ; economic integration ; risk ; production;

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References

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  1. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 430-50, June.
  2. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
  3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
  4. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 245, University of Rochester - Center for Economic Research (RCER).
  5. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1479-96, December.
  6. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  7. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  8. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(3), pages 411-434, December.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  10. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
  11. Baxter, M., 1988. "Approximating Suboptimal Dynamic Equilibria: An Euler Equation Approach," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 139, University of Rochester - Center for Economic Research (RCER).
  12. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 797-818, September.
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