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Financial Globalization and Real Regionalization

  • Jonathan Heathcote
  • Fabrizio Perri

Over the period 1972-1986, the correlations of GDP, employment and investment between the United States and an aggregate of Europe, Canada and Japan were respectively 0.76, 0.66, and 0.63. For the period 1986 to 2000 the same correlations were much lower: 0.26, 0.03 and -0.07 (real regionalization). At the same time, U.S. international asset trade has significantly increased. For example, between 1972 and 1999, United States gross FDI and equity assets in the same group of countries rose from 4 to 23 percent of the U.S. capital stock (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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9292.

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Date of creation: Oct 2002
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Publication status: published as Heathcote, Jonathan and Fabrizio Perri. "Financial Globalization And Real Regionalization," Journal of Economic Theory, 2004, v119(1,Nov), 207-243.
Handle: RePEc:nbr:nberwo:9292
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