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On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility

Author

Listed:
  • Mirdala, Rajmund
  • Svrčeková, Aneta
  • Semančíková, Jozefína

Abstract

Effects of international financial integration on the volatility of the total output and its main components have been a subject of rigorous academic discussion for decades. Even nowadays recent empirical literature suggests that its long-term benefits on economic growth are associated with spurious and vague side effects in terms of macroeconomic volatility. This paper examines the relationship between international financial integration and output fluctuation. An analysis was conducted on a large sample of developed and developing countries over the past 40 years. We follow the approach employed by Kose et al. (2003) and use cross-sectional median of financial liberalization to subdivide developing economies into two groups: more financially liberalized (MFL) and less financially liberalized (LFL) economies. Our results indicate that while the volatility of output growth rates experienced a decreasing trend over time, financial integration had a significant contribution to output fluctuations. However, the relationship was stronger in developing countries.

Suggested Citation

  • Mirdala, Rajmund & Svrčeková, Aneta & Semančíková, Jozefína, 2015. "On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility," MPRA Paper 66143, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:66143
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    File URL: https://mpra.ub.uni-muenchen.de/66143/1/MPRA_paper_66143.pdf
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    References listed on IDEAS

    as
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    3. Eozenou, Patrick, 2008. "Financial Integration and Macroeconomic Volatility: Does Financial Development Matter?," MPRA Paper 12738, University Library of Munich, Germany.
    4. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2006. "How do trade and financial integration affect the relationship between growth and volatility?," Journal of International Economics, Elsevier, vol. 69(1), pages 176-202, June.
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    More about this item

    Keywords

    financial integration; financial liberalization; output volatility; consumption volatility; capital flows;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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