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Financial Integration, Credit Market Imperfections and Consumption Smoothing

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  • Asli Leblebicioglu

    () (Economics North Carolina State University)

Abstract

Recent empirical research by Kose, Prasad and Terrones (2003) shows that financial integration is associated with higher consumption volatility in developing countries. This paper provides one possible explanation as to how international financial integration can increase consumption volatility in a developing country facing credit market imperfections. I use a two country international real business cycle model where the non-traded sector in the small country faces borrowing constraints due to contract enforceability problems. Financial integration provides households insurance against domestic risks that are amplified by the financial imperfections. If the international risk-sharing opportunities are nonexistent, households can secure themselves only by adjusting their labor effort, which leads to changes in sectorial output and terms of trade. The deterioration of the terms of trade acts as a dampening effect on consumption, causing it to be less volatile under financial autarky relative to financial integration

Suggested Citation

  • Asli Leblebicioglu, 2006. "Financial Integration, Credit Market Imperfections and Consumption Smoothing," 2006 Meeting Papers 651, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:651
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    References listed on IDEAS

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    Cited by:

    1. Rudrani Bhattacharya & Ila Patnaik, 2016. "Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies," World Bank Economic Review, World Bank Group, vol. 30(1), pages 171-201.
    2. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    3. Rudrani Bhattacharya & Ila Patnaik, 2013. "Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies," IMF Working Papers 13/120, International Monetary Fund.
    4. Quy-Toan Do & Andrei A. Levchenko & Martin Ravallion, 2014. "Trade Insulation as Social Protection," NBER Chapters,in: The Economics of Food Price Volatility, pages 345-366 National Bureau of Economic Research, Inc.
    5. Pierre-Richard Agénor, 2015. "L’intégration financière internationale : Théories, évidences, et leçons des expériences récentes [International financial integration: Theory, evidence and lessons from recent experiences]," Research papers & Policy papers 1508, OCP Policy Center.
    6. Bhattacharya, Rudrani & Patnaik, Ila, 2013. "Credit constraints, productivity shocks and consumption volatility in emerging economies," Working Papers 13/121, National Institute of Public Finance and Policy.
    7. Martin D. Evans & Viktoria V. Hnatkovska, 2007. "Financial Integration, Macroeconomic Volatility, and Welfare," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 500-508, 04-05.
    8. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, Elsevier.
    9. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    10. Guillermo Larrain & Mariel Siravegna & Guillermo Yañez, 2009. "Intégration aux marchés financiers internationaux et lissage de la consommation : observations récentes en Amérique latine," Revue d'Économie Financière, Programme National Persée, vol. 95(2), pages 87-108.
    11. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series 267, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    international business cycles; financial integration;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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