Working Paper: NBER ID: w9292
Authors: Jonathan Heathcote; Fabrizio Perri
Abstract: Over the period 1972-1986, the correlations of GDP, employment and investment between the United States and an aggregate of Europe, Canada and Japan were respectively 0.76, 0.66, and 0.63. For the period 1986 to 2000 the same correlations were much lower: 0.26, 0.03 and -0.07 (real regionalization). At the same time, U.S. international asset trade has significantly increased. For example, between 1972 and 1999, United States gross FDI and equity assets in the same group of countries rose from 4 to 23 percent of the U.S. capital stock (financial globalization). We document that the correlation of real shocks between the U.S. and the rest of the world has declined. We then present a model in which international financial market integration occurs endogenously in response to less correlated shocks. Financial integration further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle.
Keywords: No keywords provided
JEL Codes: F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial globalization (F30) | decline in international correlations of economic indicators (F44) |
| decline in shock correlation (C10) | increased financial integration (F30) |
| increase in US international asset trade (F49) | decline in correlation of GDP, employment, and investment (E20) |
| decline in shock correlation (C10) | increased equilibrium diversification (D50) |
| increased equilibrium diversification (D50) | further reduction in international correlations in GDP and factor supplies (F29) |
| less correlated shocks (C10) | endogenous development of financial markets (O16) |
| less correlated shocks (C10) | changes in international business cycles (F44) |