TY - JOUR AU - Kraay,Aart AU - Ventura,Jaume TI - Trade Integration and Risk Sharing JF - National Bureau of Economic Research Working Paper Series VL - No. 8804 PY - 2002 Y2 - February 2002 UR - http://www.nber.org/papers/w8804 L1 - http://www.nber.org/papers/w8804.pdf N1 - Author contact info: Aart Kraay The World Bank Group Mail Stop MC3-301 1818 H Street NW Washington, DC 20433 Tel: 202 473-5756 Fax: 202 522-3518 E-Mail: AKraay@worldbank.org Jaume Ventura CREI Universitat Pompeu Fabra Ramon Trias Fargas, 25-27 08005-Barcelona SPAIN Tel: +34 93 542 1765 Fax: +34 93 542 1860 E-Mail: jventura@crei.cat AB - 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. ER -