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Why Has the U.S. Economy Become Less Correlated with the Rest of the World?

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  • Jonathan Heathcote
  • Fabrizio Perri

Abstract

In this paper we do two things. First we document that over the last 40 years the U.S. business cycle has become less synchronized with the cycle in the rest of the world. Second we try to explain why this has happened. We use a general-equilibrium model as a tool to discriminate between two alternative explanations: (i) a change in the nature of real shocks, and (ii) an increase in U.S. financial integration with the rest of the world. Our results indicate that financial integration has played the major role in producing the observed changes in international co-movement.

Suggested Citation

  • Jonathan Heathcote & Fabrizio Perri, 2003. "Why Has the U.S. Economy Become Less Correlated with the Rest of the World?," American Economic Review, American Economic Association, vol. 93(2), pages 63-69, May.
  • Handle: RePEc:aea:aecrev:v:93:y:2003:i:2:p:63-69 Note: DOI: 10.1257/000282803321946813
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    References listed on IDEAS

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    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, pages 84-103.
    2. repec:fth:nystbu:92-6 is not listed on IDEAS
    3. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-854, November.
    4. David K. Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve Revisited," Working Papers 92-6, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
    6. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    7. Pakko, Michael R, 1997. "International Risk Sharing and Low Cross-Country Consumption Correlations: Are They Really Inconsistent?," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 386-400, August.
    8. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, pages 345-380.
    9. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, pages 207-243.
    10. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, pages 69-89.
    11. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, pages 84-103.
    12. Arvanitis, Athanasios V & Mikkola, Anne, 1996. "Asset-Market Structure and International Trade Dynamics," American Economic Review, American Economic Association, pages 67-70.
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