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Macroeconomic volatility after trade and capital account liberalization

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  • Pancaro, Cosimo

Abstract

What are the equilibrium effects of trade and capital liberalization on consumption smoothing? This question is addressed by studying the response to productivity shocks in a baseline two country, two goods, incomplete market model, where foreign borrowing is secured by collateral. The paper shows that international financial integration, modeled by relaxing a borrowing constraint a la Kiyotaki in the domestic country, worsens consumption smoothing; international trade integration, modeled by a reduction of non linear iceberg transportation costs, improves it. As a measure of consumption smoothing, the analysis uses the ratio between the simulated standard deviation of consumption growth and the simulated standard deviation of output growth. These results are qualitatively consistent with the empirical evidence provided by Kose, Prasad and Terrones (2003).

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5441.

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Date of creation: 01 Oct 2010
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Handle: RePEc:wbk:wbrwps:5441

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Keywords: Emerging Markets; Economic Theory&Research; Free Trade; Debt Markets; Trade Policy;

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