How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility

By Eswar S. Prasad, Marco E. Terrones, Ayhan Kose. Social Science Research Network, 2004

348 citations recorded by the source corpus.

The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom—that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization—a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. We employ various econometric techniques and a comprehensive new dataset to analyze the link between growth and volatility. Our findings suggest that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration attenuate this negative relationship. Specifically, countries that are more open to trade appear to face a less severe tradeoff between growth and volatility. We find a similar, although slightly less robust, result for the interaction of financial integration with volatility. We also investigate some of the channels, including investment and credit, through which different aspects of global integration could affect the growth-volatility relationship.

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Citations in the corpus

Common Factors in Latin America's Business Cycles (2006, unknown): “WP/06/49 Common Factors in Latin America’s Business Cycles Marco Aiolfi, Luis Catão, Allan Timmermann © 2006 International Monetary Fund WP/06/49 IMF Working Paper Research Department Common Factors in Latin America’s Business Cycles Prepared by Marco Aiolfi, Luis Catão, Allan Timmermann1 Authorized”
The Transmission of Financial Stress from Advanced to Emerging Economies (2009, result): “This finding is consistent with results reported in the literature (e.g., Kose et al. 2005).”
Does financial globalization promote risk sharing (2009, background): “In particular, private capital flows from industrialized economies to developing economies have increased dramatically since the mid-1980s, with most of these flows going to emerging market economies (see Kose et al., 2006a,b).”
Financial Globalization and Economic Policies (2009, unknown): “For an extensive discussion of these issues, see Kose et al. (2006).”
Foreign Capital and Economic Growth (2007, unknown): “18 Kose, Prasad, and Terrones (2006).”