Macroeconomic Volatility after Trade and Capital Account Liberalization
What are the equilibrium effects of trade and capital liberalization on consumption smoothing? This question is addressed by studying the response to productivity shocks in a baseline two country, two goods, incomplete market model, where foreign b...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101006152610 http://hdl.handle.net/10986/3923 |
| Summary: | What are the equilibrium effects of
trade and capital liberalization on consumption smoothing?
This question is addressed by studying the response to
productivity shocks in a baseline two country, two goods,
incomplete market model, where foreign borrowing is secured
by collateral. The paper shows that international financial
integration, modeled by relaxing a borrowing constraint a la
Kiyotaki in the domestic country, worsens consumption
smoothing; international trade integration, modeled by a
reduction of non linear iceberg transportation costs,
improves it. As a measure of consumption smoothing, the
analysis uses the ratio between the simulated standard
deviation of consumption growth and the simulated standard
deviation of output growth. These results are qualitatively
consistent with the empirical evidence provided by Kose,
Prasad and Terrones (2003). |
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