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How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility?

  • Kose, M. Ayhan

    ()

    (International Monetary Fund)

  • Prasad, Eswar

    ()

    (Cornell University)

  • Terrones, Marco E.

    ()

    (International Monetary Fund)

The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom – that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization – a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. Using a comprehensive new dataset, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship. Specifically, we find that the estimated coefficient on the interaction between volatility and trade integration is significantly positive. We find a similar, although less significant, result for the interaction of financial integration with volatility.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2252.

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Length: 43 pages
Date of creation: Aug 2006
Date of revision:
Publication status: published in: Journal of International Economics, 2006, 69 (1), 176-202
Handle: RePEc:iza:izadps:dp2252
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