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Financial integration, Volatility and crises

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  • Ben Doudou Makrem

    (University of Tunis El Manar, Tunisia.)

Abstract

In this paper, we present the root cause of the American financial crisis in 2007. We show that financial integration and capital flow volatility is the factor that creates a climate conducive to the emergence of the crisis in the U.S.A. and led to its spread to the rest of the world. On the theoretical side, we show that capital flows to the United States in recent years had a pro-cyclical character. We show also that this behavior was the root cause of the crisis and even previous crises such as the Mexican crisis in 1994 and the Asian crisis in 1998. Empirically, we use recent panels data to show that financial integration can lead to financial crises by increasing the volatility of capital flows.

Suggested Citation

  • Ben Doudou Makrem, 2014. "Financial integration, Volatility and crises," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 2, pages 1-1, December.
    • Handle: RePEc:eac:articl:11/13
    as

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    References listed on IDEAS

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    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    5. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
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