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 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).

Bibliographic Details

Main Author:	Pancaro, Cosimo
Language:	English
Published:	2010-10-01
Subjects:	ACCELERATOR, ADVANCED COUNTRIES, ADVANCED ECONOMIES, ADVANCED ECONOMY, ALLOCATION OF CAPITAL, AMOUNT OF COLLATERAL, AMOUNT OF DEBT, BANK POLICY, BENCHMARK, BOND, BORROWER, BUDGET CONSTRAINT, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL ACCOUNT LIBERALIZATION, CAPITAL FLOWS, CAPITAL MOBILITY, CAPITAL SHARE, CAPITAL STOCK, CENTRAL BANK, COLLATERAL, CONSUMPTION SMOOTHING, CREDIT MARKET, DEBT, DEBTS, DEVELOPING COUNTRIES, DEVELOPING ECONOMIES, DEVELOPMENT BANK, DEVELOPMENT ECONOMICS, DOMESTIC CONSUMPTION, DOMESTIC PRICE, DOMESTIC PRICE OF IMPORTS, DURABLE, DURABLE GOODS, ECONOMIC DEVELOPMENT, ECONOMIC FLUCTUATIONS, ECONOMIC VOLATILITY, ELASTICITY, ELASTICITY OF LABOR SUPPLY, ELASTICITY OF SUBSTITUTION, EMERGING ECONOMIES, EMERGING ECONOMY, EMERGING MARKET, EMERGING MARKET ECONOMIES, EMERGING MARKETS, EQUILIBRIUM, EXPECTED UTILITY, EXPORTS, EXTERNAL ASSETS, EXTERNAL SHOCKS, FINAL GOODS, FINANCIAL DEVELOPMENT, FINANCIAL FLOWS, FINANCIAL INSTITUTIONS, FINANCIAL INTEGRATION, FINANCIAL LIBERALIZATION, FINANCIAL MARKETS, FINANCIAL OPENNESS, FOREIGN ASSET, FOREIGN ASSET POSITION, FOREIGN ASSETS, FOREIGN GOODS, FOREIGN MARKETS, FOREIGN TECHNOLOGIES, FREE TRADE, GDP, GENERAL EQUILIBRIUM, GLOBALIZATION, GROWTH VOLATILITY, HOLDING, HOME COUNTRY, IMPACT OF TRADE, IMPORT SHARE, INCOME, INCOME SHOCK, INCOMPLETE MARKETS, INDUSTRY TRADE, INSURANCE, INTEREST RATE, INTERMEDIATE GOODS, INTERMEDIATE INPUTS, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL BUSINESS, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL INTEGRATION, INTERNATIONAL FINANCIAL MARKETS, INTERNATIONAL TRADE, INTERNATIONAL TRANSPORTATION, LENDERS, LIBERALIZATION, LOAN, MACROECONOMIC INSTABILITY, MACROECONOMIC POLICY, MACROECONOMIC VOLATILITY, MACROECONOMICS, MARGINAL COST, MARGINAL UTILITY, MARGINAL UTILITY OF CONSUMPTION, MARGINAL VALUE, MARKET IMPERFECTIONS, MARKET INTEGRATION, MARKET REFORMS, MICRO DATA, MONETARY POLICY, NET EXPORTS, NON-TARIFF BARRIERS, OPEN ECONOMIES, OPEN ECONOMY, OPENNESS, OPTIMIZATION, OUTPUT, PERFECT COMPETITION, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO FLOWS, POSITIVE EFFECTS, PROCESS OF INTEGRATION, PRODUCTION FUNCTION, PRODUCTION FUNCTIONS, PRODUCTIVITY, REAL ESTATE, RETURN, RISK SHARING, SHARE OF WORLD TRADE, SMALL COUNTRY, SPECIALIZATION, TARIFF BARRIERS, TERMS OF TRADE, TRADE BALANCE, TRADE COSTS, TRADE INTEGRATION, TRADE LIBERALIZATION, TRADE OPENNESS, TRADING, TRANSMISSION OF PRODUCTIVITY, TRANSPORT COSTS, TROUGH, UTILITY FUNCTION, VALUE OF COLLATERAL, VALUE OF EXPORTS, VOLATILITY, WAGE RATE, WEALTH, WEALTH EFFECT, WORLD ECONOMY, WORLD TRADE,
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 https://hdl.handle.net/10986/3923
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