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Financial Globalization and Real Regionalization

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Abstract

Over the period 1972-1986, the U.S. business cycle was strongly correlated with the business cycle in the rest of the industrialized world. Over the period 1986-2000, international co-movement was much weaker (real regionalization). At the same time, U.S. international asset trade has increased significantly (financial globalization). We first document these phenomena in detail and then argue that they are related. In particular, we present a model in which financial globalization occurs endogenously in response to less correlated real shocks. Financial globalization, by enhancing cross-border capital flows, further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and the endogenous change in international financial markets are needed to quantitatively account for the observed changes in the international business cycle.

Suggested Citation

  • Jonathan Heathcote, 2003. "Financial Globalization and Real Regionalization," Working Papers gueconwpa~03-03-20, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~03-03-20

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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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