Financial Integration and Macroeconomic Volatility

IMF Working Papers, March 1, 2003

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Financial Integration and Macroeconomic Volatility

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Bibliographic details

• Authors: Marco Terrones, Eswar S Prasad, Ayhan Kose
• Published: March 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451846997.001

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.
• Two major results:
  • While the volatility of output growth has, on average, declined in the 1990s relative to the three preceding decades, the volatility of consumption growth relative to that of income growth has increased for more financially integrated developing economies in the 1990s.
  • 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.

Major findings

• Volatility of output growth:
  • On average, declined in the 1990s relative to the three preceding decades.
• Consumption vs. income volatility:
  • On average, the volatility of consumption growth relative to that of income growth increased for more financially integrated developing economies in the 1990s.
• Financial openness and consumption volatility:
  • Increasing financial openness is associated with rising relative volatility of consumption, but only up to a certain threshold.
  • Improved risk-sharing and consumption-smoothing benefits from financial integration appear to accrue only beyond this threshold.

Policy implications and interpretation

• Financial integration does not automatically deliver consumption-smoothing benefits for developing economies; benefits emerge only after surpassing a certain level of financial openness.
• Policymakers in developing economies should consider the non-linear relationship between financial openness and consumption volatility when designing liberalization strategies and risk-management frameworks.

Subjects and keywords

• 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

Content in this bundle

• Financial Intergration and Macroeconomic Volatility - WP/03/50
  • Financial Intergration and Macroeconomic Volatility - WP/03/50 (Markdown version)
  • Financial Intergration and Macroeconomic Volatility - WP/03/50 (PDF)