Trade integration and risk sharing
By: Aart Kraay [and] Jaume Ventura
Contributors: Ventura, Jaume; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-08; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-08.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2002
Place of publication: Cambridge, MA
Language: eng
Number of pages: 39
Description: 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 and find that this increases the volatility of the trade balance. This result applies regardless of whether supply or demand shocks are the main source of economic fluctuations. Both type of shocks generate fluctuations in the trade balance that are in part moderated by stabilizing movements in the terms of trade. Trade integration dampens these terms of trade movements and, for a given distribution of shocks, amplifies fluctuations in the trade balance. To overturn this result, one must assume that either trade integration is sufficiently biased towards goods with strong comparative advantage and/or risk aversion is sufficiently extreme. We calibrate the model to U.S. data and find that, for reasonable parameter values, increased trade in services could double the volatility of the trade balance. Keywords: International trade, risk sharing, trade integration, trade balance. JEL Classification: F15, F36, G15.
Notes: "February 2002."

Includes bibliographical references (p. 30).

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