Financial Integration and Macroeconomic Volatility

International Monetary Fund Staff Papers, Forthcoming

Posted: 22 May 2003

See all articles by M. Ayhan Kose

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Marco E. Terrones

International Monetary Fund (IMF)

Abstract

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.

Keywords: globalization, business cycles, volatility, macroeconomic fluctuations, emerging markets

JEL Classification: F41, E32

Suggested Citation

Kose, M. Ayhan and Prasad, Eswar S. and Terrones, Marco E., Financial Integration and Macroeconomic Volatility. International Monetary Fund Staff Papers, Forthcoming, Available at SSRN: https://ssrn.com/abstract=409300

M. Ayhan Kose (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
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Brookings Institution ( email )

1775 Massachusetts Ave, NW
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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NBER ( email )

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IZA Institute of Labor Economics

P.O. Box 7240
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Germany

Marco E. Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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