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The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development

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  • Spiros Bougheas
  • Rod Falvey

Abstract

We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are largely determined by domestic monetary policy, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.

Suggested Citation

  • Spiros Bougheas & Rod Falvey, "undated". "The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development," Discussion Papers 11/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  • Handle: RePEc:not:notcfc:11/03
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    References listed on IDEAS

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    More about this item

    Keywords

    International business cycles; prices; interest rates.;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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