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

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  • Miklós Koren

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.

Suggested Citation

  • Miklós Koren, 2003. "Financial Globalization, Portfolio Diversification, and the Pattern of International Trade," IMF Working Papers 2003/233, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/233
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    2. Diah Kristina & Tulus Haryono, 2015. "Indonesian Online Tourism Promotion: a Rhetorical and Discoursal Look," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 1, ejes_v1_i.
    3. Miklos Koren & Silvana Tenreyro, 2003. "Diversification and development," Working Papers 03-3, Federal Reserve Bank of Boston.
    4. Alan M. Taylor & Janine L. F. Wilson, 2006. "International Trade and Finance under the Two Hegemons: Complementaries in the United Kingdom 1870-1913 and the United States 1920-30," NBER Working Papers 12543, National Bureau of Economic Research, Inc.
    5. Julian di Giovanni & Andrei A. Levchenko, 2012. "The Risk Content of Exports: A Portfolio View of International Trade," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 97-151.
    6. Alejandro Cuñat & Christian Fons-Rosen, 2013. "Relative Factor Endowments And International Portfolio Choice," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 166-200, February.
    7. Reis, Pedro Nogueira & Pinto, António Pedro Soares, 2024. "Unlocking portfolio resilient and persistent risk: A holistic approach to unveiling potential grounds," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    8. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).
    9. Basu, Arnab K. & Chau, Nancy H., 2007. "A risk-based rationale for two-way capital flows: Why do capital flights and inward foreign direct investments co-exist?," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 37-59.
    10. Hu, Chenyue, 2020. "Industrial specialization matters: A new angle on equity home Bias," Journal of International Economics, Elsevier, vol. 126(C).
    11. Hu, Chenyue, 2023. "What explains equity home bias? Theory and evidence at the sector level," European Economic Review, Elsevier, vol. 160(C).
    12. Federico Esposito, 2016. "Risk Diversification and International Trade," 2016 Meeting Papers 302, Society for Economic Dynamics.
    13. Önder, Ali Sina & Yilmazkuday, Hakan, 2016. "Trade partner diversification and growth: How trade links matter," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 241-258.
    14. Islamaj Ergys, 2014. "Industrial specialization, financial integration and international consumption risk sharing," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 477-509, January.
    15. Kim, Soyoung & Shim, Seri & Park, Donghyun, 2022. "Dynamic interactions between trade globalization and financial globalization: A heterogeneous panel VAR approach," Journal of International Money and Finance, Elsevier, vol. 122(C).
    16. Taylor, Alan M. & Wilson, Janine L.F., 2011. "International trade and finance: Complementaries in the United Kingdom 1870-1913 and the United States 1920-1930," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 268-288, February.

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