Financial Globalization, Portfolio Diversification, and the Pattern of International Trade
IMF Working Papers, December 1, 2003
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- Financial Globalization, Portfolio Diversification, and the Pattern of International Trade
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Bibliographic details
- Authors: Miklós Koren
- Published: December 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875614.001
Model and mechanism
- General-equilibrium model where incomplete international financial markets generate:
- Insufficient industrial specialization.
- Low international trade.
- Mechanism: Because international portfolio diversification is limited and productivity is uncertain, investors prefer to maintain a diversified industrial structure rather than specialize according to comparative advantage.
- Financial globalization reduces diversification constraints, inducing more specialization and thereby increasing trade.
Analytical results
- The framework yields explicit closed-form solutions for:
- The volume of trade.
- The structure of trade.
- The model integrates concepts and terminology including: comparative advantage, utility function, portfolio choice, max E, productivity shock, Ricardian trade model, trade dependence ratio, trade structure estimation, trade volume.
Empirical findings
- Empirical results support the theory's implications. Specifically, trade in financially open countries is:
- (i) higher,
- (ii) more dependent on productivity differences, and
- (iii) less sensitive to industry risks.
Policy-relevant implications
- Financial globalization can be expected to:
- Encourage industrial specialization aligned with comparative advantage.
- Increase the volume of international trade.
- Alter the determinants of trade toward productivity differences and away from industry-specific risk sensitivity.