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

Mirdala, Rajmund and Svrčeková, Aneta and Semančíková, Jozefína (2015): On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility. Published in: Journal of Applied Economic Sciences , Vol. 10, No. 2 (July 2015): pp. 552-570.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial integration, financial liberalization, output volatility, consumption volatility, capital flows
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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