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Financial Integration and Macroeconomic Volatility

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Author Info

  • Marco Terrones
  • Eswar Prasad
  • M. Ayhan Kose

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/50.

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Length: 28
Date of creation: 01 Mar 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/50

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Related research

Keywords: Exchange risk; Income; financial integration; output volatility; capital flows; trade openness; trade integration; terms of trade; international financial; international financial integration; output growth; open economies; globalization; trade shocks; open economy; market integration; financial globalization; economic integration; per capita income; financial markets; terms of trade shocks; market liberalization; impact of trade; aggregate volatility; terms of trade effects; trade effects; foreign trade; impact of trade integration; export price; trade flows; economic cooperation; political economy; openness measure; foreign assets; process of integration; increased trade; oil shock; international financial statistics; intermediate inputs; import price; international policy coordination; international financial system; capital markets; asset market; monetary union; external shocks; transition economies; exchange rates;

References

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