Financial Integration, Excess Consumption Volatility, and the World Real Interest Rate

Haruna Yamada

No HIAS-E-133, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: Contrary to classical macroeconomic theory, the volatility of consumption relative to income has risen in emerging markets despite the international financial integration. This study presents a theoretical mechanism of this phenomenon by developing a small open economy model with an occasionally binding borrowing constraint, named the Interest Coverage Ratio-based borrowing constraint. Calibration exercises show that financial integration improves consumption smoothing and mitigates income shocks. Meanwhile, the foreign debt limit is more sensitive to changes in the world real interest rate. An increase in the world real interest rate tightens the borrowing constraint and decreases consumption significantly for the repayment. Financial integration would make consumption more vulnerable to the world real interest rate changes, resulting the higher volatility in emerging markets.

Keywords: Financial Integration; Excess Consumption Volatility; Emerging Market Economy; World Real Interest Rate; Occasionally Binding Borrowing Constraint (search for similar items in EconPapers)
JEL-codes: E21 E41 E44 F62 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2023-09
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-ger and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/80503/070_hiasDP-E-133.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-133

Access Statistics for this paper

More papers in Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University Contact information at EDIRC.
Bibliographic data for series maintained by Digital Resources Section, Hitotsubashi University Library ().