Macroeconomic Volatility after Trade and Capital Account Liberalization

32 Pages Posted: 20 Apr 2016

Date Written: October 1, 2010

Abstract

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).

Keywords: Emerging Markets, Economic Theory & Research, Free Trade, Debt Markets, Trade Policy

Suggested Citation

Pancaro, Cosimo, Macroeconomic Volatility after Trade and Capital Account Liberalization (October 1, 2010). World Bank Policy Research Working Paper No. 5441, Available at SSRN: https://ssrn.com/abstract=1688808

Cosimo Pancaro (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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