Working Paper: CEPR ID: DP1337
Authors: Alan Sutherland
Abstract: Imperfect capital mobility is modelled in a two-country intertemporal general equilibrium framework by assuming that agents face costs of adjusting asset stocks in foreign asset markets. Goods markets are imperfectly competitive and goods prices are subject to sluggish adjustment. Simulation experiments show that increasing financial market integration (represented by reducing the cost of transacting in foreign asset markets) increases the volatility of a number of variables when shocks originate from the money market, but decreases the volatility of most variables when shocks originate from real demand or supply.
Keywords: capital mobility; financial market integration; exchange rates
JEL Codes: F31; F32; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial market integration (F30) | Economic volatility (money market shocks) (E44) |
| Financial market integration (F30) | Economic volatility (real demand or supply shocks) (E32) |
| Sluggish price adjustments (E31) | Economic volatility (E32) |
| Imperfect competition (L13) | Economic volatility (E32) |