Financial Globalization, Portfolio Diversification, and the Pattern of International Trade

December 1, 2003

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Format: Chicago

Miklós Koren. Financial Globalization, Portfolio Diversification, and the Pattern of International Trade, (USA: International Monetary Fund, 2003) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper provides a general-equilibrium model where incomplete international financial markets lead to insufficient industrial specialization and low international trade. As international portfolio diversification is limited and productivity is uncertain, investors wish to maintain a diversified industrial structure rather than specializing according to their comparative advantage. Financial globalization then induces more specialization and more trade. The present framework yields explicit closed-form solutions for the volume and the structure of trade. Empirical results support the implications of the theory. Trade in financially open countries is (i) higher, (ii) more dependent on productivity differences, and (iii) less sensitive to industry risks.

Subject: Comparative advantage, Consumption, Financial markets, International capital markets, International trade, National accounts, Production, Productivity, Trade balance

Keywords: Comparative advantage, Consumption, Financial globalization, Global, Goods trade, Incomplete markets, International capital markets, Max E, Portfolio choice, Productivity, Productivity difference, Productivity shock, Ricardian trade model, Trade balance, Trade dependence ratio, Trade structure, Trade structure estimation, Trade volume, Utility function, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/233
Stock No:

WPIEA2332003
ISBN:

9781451875614
ISSN:

1018-5941

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