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Understanding the international great moderation

Author

Listed:
  • Vincenzo Quadrini

    (University of Southern California)

  • Fabrizio Perri

    (University of Minnesota and Minneapolis FED)

Abstract

The majority of OECD countries has experienced a reduction in macroeconomic volatility during the last two decades. This period is also characterized by a gradual liberalization of the capital accounts in these countries. We first show that, on average, countries/periods with more open capital markets are associated with lower macroeconomic volatility. Second we provide a theory of why capital account liberalization can lead to less macroeconomic volatility. In a simple open economy setting we study the impact of more open capital markets on the transmission and the amplification of two types of shocks: financial and real. We find that, in any given country, greater international integration substantially reduces the amplification of financial shocks; we also find that this channel can quantitatively affect business cycles dynamics. Our findings suggest that up to 1/3 of the worldwide reduction in business cycle volatility can be explained by greater international financial integration.

Suggested Citation

  • Vincenzo Quadrini & Fabrizio Perri, 2008. "Understanding the international great moderation," 2008 Meeting Papers 1057, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:1057
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    References listed on IDEAS

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    1. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
    2. de Blas Beatriz, 2009. "Can Financial Frictions Help Explain the Performance of the U.S. Fed?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-30, June.
    3. Ester Faia & Eleni Iliopulos, 2010. "Financial Globalization, Financial Frictions and Optimal Monetary Policy," Post-Print halshs-00497486, HAL.
    4. Benk, Szil rd & Gillman, Max & Kejak, Michal, 2008. "US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle," Cardiff Economics Working Papers E2008/28, Cardiff University, Cardiff Business School, Economics Section.
    5. Ester Faia, 2011. "Macroeconomic and welfare implications of financial globalization," Journal of Applied Economics, Universidad del CEMA, vol. 14, pages 119-144, May.
    6. Solomos, Dionysios & Papageorgiou, Theofanis & Koumparoulis, Dimitrios, 2012. "Financial Sector and Business Cycles Determinants in the EMU context: An Empirical Approach (1996-2011)," MPRA Paper 43858, University Library of Munich, Germany.

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