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Financial Integration and Macroeconomic Volatility: Does Financial Development Matter?

Eozenou, Patrick (2008): Financial Integration and Macroeconomic Volatility: Does Financial Development Matter?

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Abstract

In this paper, we analyze the relationship between international financial integration and macroeconomic volatility. Looking at a panel of 90 countries over the period 1960-2000, we find that domestic financial conditions matter when assessing the impact of financial integration on consumption growth volatility. More specifically, consumption growth volatility is found to increase with the degree of financial integration in countries with low level of financial development and to decrease in countries with high level of financial development. When measuring domestic financial conditions by the share of private credits to GDP, the threshold level of financial development above which financial integration yields consumption smoothing benefits is estimated to be around 60%-70% GDP.

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