Financial Integration and Macroeconomic Volatility

By Marco Terrones, Eswar S Prasad, Ayhan Kose

March 1, 2003

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Marco Terrones, Eswar S Prasad, and Ayhan Kose. Financial Integration and Macroeconomic Volatility, (USA: International Monetary Fund, 2003) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the impact of international financial integration on 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 preceding 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.

Subject: Balance of payments, Capital flows, Consumption, Financial integration, Financial markets, Income, International trade, National accounts, Terms of trade

Keywords: Capital flows, Consumption, Consumption volatility, Consumption-smoothing opportunity, Economy, Financial Globalization, Financial integration, Global, Growth volatility, Income, Income and Consumption Volatility, Income volatility, International Risk Sharing, Macroeconomic Fluctuations, Terms of trade, Terms of trade shock, Terms of trade volatility, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/050
Stock No:

WPIEA0502003
ISBN:

9781451846997
ISSN:

1018-5941

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