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Financial Globalization and Real Regionalization

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  • Jonathan Heathcote
  • Fabrizio Perri

Abstract

Over the period 1973-1985, the correlations of GDP, employment and investment between the United States and an aggregate of major trading partners were respectively 0.76, 0.67, and 0.61. Between 1986-1998 the same correlations were much lower: 0.25, -0.19, and 0.16 (real regionalization). At the same time, U.S. international asset trade has significantly increased. For example, between 1980 and 1999, United States gross foreign assets rose from 27 to 77 percent of U.S. GDP (financial globalization). We document that the correlation of real shocks between the U.S. and the rest of the world has declined. We then present a model in which international financial market integration occurs endogenously in response to less correlated shocks. Financial integration further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle.

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Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 01-11.

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Date of creation: 2001
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Handle: RePEc:ste:nystbu:01-11

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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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  2. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
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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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