Financial Openness, Financial Frictions, and Macroeconomic Fluctuations in Emerging Market Economies

Yong Ma

Emerging Markets Finance and Trade, 2016, vol. 52, issue 1, 169-187

Abstract: This article develops an open economy DSGE model which takes into account the effects of financial openness and the associated financial frictions on macroeconomic fluctuations by introducing a modified version of interest parity. Evidence from the Chinese economy shows that the model provides a reasonable description of China’s financial openness and financial frictions during the sample period. Further evidence from comparative analysis shows that in most cases an increase in financial openness, usually accompanied by a decrease in financial frictions, leads to flatter volatility patterns with respect to domestic shocks but sharper volatility patterns in the presence of foreign shocks.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:52:y:2016:i:1:p:169-187

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DOI: 10.1080/1540496X.2014.998549

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