International Financial Integration and the Real Economy

What are the consequences offinancial integration for the real economy? This paper develops a set of theoretical benchmarks for the link between integration and macroeconomic volatility and welfare. The analysis is conducted in a standard two-sector international real business cycle model in which w...

Full description

Saved in:
Bibliographic Details
Published in:IMF staff papers 2007-06, Vol.54 (2), p.220-269
Main Authors: Evans, Martin D. D., Hnatkovska, Viktoria V.
Format: Article
Language:English
Subjects:
Business cycles
Capital investments
Capital Markets
Consumer economics
D52
Dividends
Economic models
Economic Policy
Economics
Economics and Finance
Equity
F36
Financial investments
Financial markets
Financial portfolios
Foreign securities
G11
Household consumption
IMF Seventh Jacques Polak Annual Research Conference
Integration
International Economics
International finance
International markets
Investment analysis
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Market clearing prices
Productivity
Studies
Volatility
Wealth
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:What are the consequences offinancial integration for the real economy? This paper develops a set of theoretical benchmarks for the link between integration and macroeconomic volatility and welfare. The analysis is conducted in a standard two-sector international real business cycle model in which we introduce dynamic portfolio choice over equities and an international bond. The model predicts an increase in the volatility of output in response to integration, whereas the relationship between integration and consumption volatility is hump-shaped. We also find that financial integration is associated with significant improvement in risk-sharing across countries, although in aggregate the welfare benefits are very small. At the same time, the level of financial integration significantly affects how the welfare benefits of productivity shocks are distributed internationally.
ISSN:1020-7635
2041-4161
1564-5150
2041-417X
DOI:10.1057/palgrave.imfsp.9450011