NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Integration and Risk Sharing

Aart Kraay, Jaume Ventura

NBER Working Paper No. 8804
Issued in February 2002
NBER Program(s):   IFM   ITI

What are the effects of increased trade in goods and services on the trade balance? We study the effects of reducing transport costs in a Ricardian model with complete asset markets. Trade integration has three effects on the structure of the economy: a reduction in the home bias in consumption, an increase in the degree of international competition in goods markets, and a reduction in real exchange rate volatility. The reduction in the home bias increases the volatility of the trade balance regardless of the source of shocks. Except for the case where supply shocks lead to counter-cyclical trade balances, (i) the increase in international competition also increases the volatility of the trade balance; and (ii) the reduction in real exchange rate volatility increases the volatility of the trade balance if risk aversion is low but lowers it if risk aversion is high. The opposite applies when supply shocks lead to counter-cyclical trade balances. We calibrate the model to U.S. data and provide a quantitative assessment of the effects of increased trade in services on the trade balance.

download in pdf format
   (255 K)

email paper

This paper is available as PDF (255 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8804

Published: Kraay, Aart and Jaume Ventura. "Trade Integration And Risk Sharing," European Economic Review, 2002, v46(6,Jun), 1023-1048. citation courtesy of

Users who downloaded this paper also downloaded these:
Krueger w5084 Free Trade Agreements versus Customs Unions
Cole and Obstfeld w3027 Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?
Helpman, Itskhoki, and Redding w16662 Trade and Labor Market Outcomes
Chari and Henry w8988 Risk Sharing and Asset Prices: Evidence From a Natural Experiment
Baldwin and Martin w6904 Two Waves of Globalisation: Superficial Similarities, Fundamental Differences
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us