FINANCIAL MARKET INTEGRATION AND MACROECONOMIC VOLATILITY

The process of financial market integration is modelled in an intertem poral general equilibrium framework as the elimination of trading fric tions between financial markets in different countries. Goods markets are assumed to be imperfectly competitive and goods prices are subject to sluggish adjustment. Simulation experiments show that increasing f inancial market integration increases the volatility of a number of va riables when shocks originate from the money market, but decreases the volatility of most variables when shocks originate from real demand o r supply.