NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Markets Integration, Volatility and Persistence

Joshua Aizenman

NBER Working Paper No. 5241
Issued in August 1995
NBER Program(s):   ITI

This paper shows that volatility induces adverse first order welfare effects in countries excluded from the global capital market. This result is illustrated in a model characterized by gains from a greater division of activities, where shocks are persistent. We show that non-linearities attributed to financial autarky explain the adverse welfare effects of volatility. We identify the parameters determining the magnitude of the loss -- it is proportional to the autocorrelation of shocks, to volatility (as measured by the standard deviation of shocks), and to the degree of product differentiation (as measured by the substitutability among intermediate products).

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Document Object Identifier (DOI): 10.3386/w5241

Published: Journal of Macroeconomics, Vol. 19 (1997): 217-236. citation courtesy of

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