Working Paper

North-South financial integration and business cycles

Abstract: This paper examines the business cycle implications of increased North-South trade in financial assets. We build a quantitative general equilibrium model of North-South trade and compare the model's predictions under two asset market assumptions: a restricted setting in which asset trade is limited to a non-contingent one-period bond market; and a highly integrated setting in which agents have access to a complete contingent-claims market. Simulations of the North-South model suggest that increased North-South trade in asset markets (a) lowers Southern consumption and output volatility, and (b) weakens North-South output and consumption correlations, at business cycle frequencies.

Keywords: Business cycles; International trade;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series, Macroeconomic Issues

Publication Date: 1996

Number: WP-96-10