TY  - JOUR
AU  - Heathcote,Jonathan
AU  - Perri,Fabrizio
TI  - Financial Globalization and Real Regionalization
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9292
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9292
L1  - http://www.nber.org/papers/w9292.pdf
N1  - Author contact info:
Jonathan Heathcote
Federal Reserve Bank of Minneapolis
Research Department
90 Hennepin Ave.
Minneapolis, MN 55401
Tel: (612) 204-6385
E-Mail: heathcote@minneapolisfed.org

Fabrizio Perri
Universita' Bocconi
Department of Economics
Via Roentgen, 1 - 20136
Milano, Italy
Tel: +39 02 5836 5793
E-Mail: fperri@umn.edu
AB  - Over the period 1972-1986, the correlations of GDP, employment and investment between the United States and an aggregate of Europe, Canada and Japan were respectively 0.76, 0.66, and 0.63. For the period 1986 to 2000 the same correlations were much lower: 0.26, 0.03 and -0.07 (real regionalization). At the same time, U.S. international asset trade has significantly increased. For example, between 1972 and 1999, United States gross FDI and equity assets in the same group of countries rose from 4 to 23 percent of the U.S. capital stock (financial globalization). We document that the correlation of real shocks between the U.S. and the rest of the world has declined. We then present a model in which international financial market integration occurs endogenously in response to less correlated shocks. Financial integration further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle.
ER  -