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International Financial Integration and the Real Economy

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  • Martin D D Evans
  • Viktoria V Hnatkovska

Abstract

What are the consequences of financial integration for the real economy? This paper develops a set of theoretical benchmarks for the link between integration and macroeconomic volatility and welfare. The analysis is conducted in a standard two-sector international real business cycle model in which we introduce dynamic portfolio choice over equities and an international bond. The model predicts an increase in the volatility of output in response to integration, whereas the relationship between integration and consumption volatility is hump-shaped. We also find that financial integration is associated with significant improvement in risk-sharing across countries, although in aggregate the welfare benefits are very small. At the same time, the level of financial integration significantly affects how the welfare benefits of productivity shocks are distributed internationally. IMF Staff Papers (2007) 54, 220–269. doi:10.1057/palgrave.imfsp.9450011

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  • Martin D D Evans & Viktoria V Hnatkovska, 2007. "International Financial Integration and the Real Economy," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 220-269, June.
  • Handle: RePEc:pal:imfstp:v:54:y:2007:i:2:p:220-269
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    Cited by:

    1. Jappelli, Tullio & Pagano, Marco, 2008. "Financial market integration under EMU," CFS Working Paper Series 2008/33, Center for Financial Studies (CFS).
    2. Lathaporn Ratanavararak, 2018. "The Impact of Imperfect Financial Integration and Trade on Macroeconomic Volatility and Welfare in Emerging Markets," PIER Discussion Papers 79, Puey Ungphakorn Institute for Economic Research, revised Jan 2018.
    3. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 537-551, July.
    4. Martin D. D. Evans, 2017. "Order Flows and the Exchange Rate Disconnect Puzzle," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 15, pages 599-643 World Scientific Publishing Co. Pte. Ltd..

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