Financial Market Integration and Macroeconomic Volatility

The process of financial market integration is modelled in an intertemporal general equilibrium framework as the elimination of trading frictions 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 financial market integration increases the volatility of a number of variables when shocks originate from the money market, but decreases the volatility of most variables when shocks originate from real demand or supply.