Financial Integration and Macroeconomic Volatility

By Ayhan Kose, Eswar S. Prasad, Marco E. Terrones. Social Science Research Network, 2003

556 citations recorded by the source corpus.

This paper examines the impact of international financial integration on macroeconomic volatility. Economic theory does not provide a clear guide to the effects of financial integration on volatility, implying that this is essentially an empirical question. We provide a comprehensive examination of changes in macroeconomic volatility in a large group of industrial and developing economies over the period 1960-99. We report two major results: First, while the volatility of output growth has, on average, declined in the 1990s relative to the three earlier decades, we also document that, on average, the volatility of consumption growth relative to that of income growth has increased for more financially integrated developing economies in the 1990s. Second, increasing financial openness is associated with rising relative volatility of consumption, but only up to a certain threshold. The benefits of financial integration in terms of improved risk-sharing and consumption-smoothing possibilities appear to accrue only beyond this threshold.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7bf18fc59c963b4547b146d95895767604ffd761

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Citations in the corpus

How Does Globalization Affect the Synchronization of Business Cycles? (2003, unknown): “Our findings regarding the importance of terms of trade volatility are consistent with the results in several recent studies (see Kose, Prasad, and Terrones, 2003b).”
Do trade costs in goods market lead to home bias in equities (2009, unknown): “Fax: +331 4313 6310.”
Remittances and Household Consumption Instability in Developing Countries (2011, background): “As in Kose et al. (2003), financial openness is related to consumption instability in an inverted U relationship: the benefits of financial integration only appear beyond a given threshold (column 3).”
Understanding the Evolution of World Business Cycles (2005, background): “The results by Kose, Prasad, and Terrones (2003) suggest that both trade and financial linkages have a positive impact on cross-country output and consumption correlations.”
Financial liberalization, private investment and portfolio choice: Financialization of real sectors in emerging markets (2009, background): “Consumption volatility, for example, has increased in emerging markets during the 1990s (Kose et al., 2003).”
Output Volatility and Openness to Trade: A Reassessment (2009, background): ““Consensus” on the Relationship between Trade, Volatility and Growth per Kose et al. (2004)”
Financial Globalization: A Reappraisal (2009, background): “These results differ from those of Kose, Prasad and Terrones (2003b) due to differences in the definitions of financial integration, the measures of consumption volatility, data samples, and methodologies.”
Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time (2008, unknown): “Countries with more developed financial markets tend to experience lower output volatility, a result consistent with the theoretical predictions by Aghion, et al. (1999) and Caballero and Krishnamurthy (2001) as well as past empirical findings such as Blankenau, et al. (2001) and Kose et al. (2003).”
Financial Openness and Productivity (2009, unknown): “We use a pooled OLS estimate but the reported standard errors reflect groupwise heteroskedasticity, SUR effects, and a Newey and West (1987) adjustment with five lags for serial correlation (accounting for the overlapping nature of the data).”
Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (2007, unknown): “Kose et al. (2003) identified consumption variability in excess of income variability as a puzzling feature of the data of emerging economies.”
Effects of Financial Globalization on Developing Countries: Some Empirical Evidence (2003, background): “Interestingly, there is 23 This subsection draws heavily on Kose, Prasad, and Terrones (2003a).”