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Financial Globalization, Portfolio Diversification, and the Pattern of International Trade

Miklós Koren

No 2003/233, IMF Working Papers from International Monetary Fund

Abstract: The paper provides a general-equilibrium model where incomplete international financial markets lead to insufficient industrial specialization and low international trade. As international portfolio diversification is limited and productivity is uncertain, investors wish to maintain a diversified industrial structure rather than specializing according to their comparative advantage. Financial globalization then induces more specialization and more trade. The present framework yields explicit closed-form solutions for the volume and the structure of trade. Empirical results support the implications of the theory. Trade in financially open countries is (i) higher, (ii) more dependent on productivity differences, and (iii) less sensitive to industry risks.

Keywords: WP; utility function; max E; financial globalization; trade volume; trade structure; incomplete markets; portfolio choice; productivity shock; Ricardian trade model; goods trade; trade dependence ratio; trade structure estimation; productivity difference; Productivity; Comparative advantage; Consumption; Trade balance; International capital markets; Global (search for similar items in EconPapers)
Pages: 47
Date: 2003-12-01
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Handle: RePEc:imf:imfwpa:2003/233