Understanding the International Great Moderation
(with Fabrizio Perri)
The majority of OECD countries has experienced a reduction in the volatility of output during the past two and a half decades. This period has also been characterized by a process of capital accounts liberalization among these countries. We study an open economy business cycle model with financial market frictions and show that the international liberalization of capital markets can lead to lower volatility of output and higher co-movement among the liberalizing countries.