FINANCIAL INTEGRATION AND MACROECONOMIC VOLATILITY: NEW EVIDENCE FROM DSGE MODELING

Tarek Ghazouani, Ramzi Drissi and Jamel Boukhatem
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Ramzi Drissi: College of Islamic Economics and Finance, Umm Al-Qura University, Saudi Arabia3University of Carthage, Tunisia
Jamel Boukhatem: College of Islamic Economics and Finance, Umm Al-Qura University, Saudi Arabia4University of Tunis El-Manar, Tunisia

Annals of Financial Economics (AFE), 2019, vol. 14, issue 02, 1-19

Abstract: This paper provides a brief overview of theoretical and empirical literature on financial integration and macroeconomic volatility nexus highlighting how the degree of financial integration affects the volatility of macroeconomic fundamentals. Using a dynamic stochastic general equilibrium (DSGE) model, our findings show that: (i) higher degree of financial integration tends to decrease short-run volatility; (ii) following monetary policy shocks, financial integration increases nominal exchange rate and output volatility and reduces both nominal and real interest rates and consumption volatility; and (iii) in response to fiscal shocks, financial integration stabilizes all variables under the assumption of perfect capital mobility.

Keywords: Financial integration; macroeconomic volatility; DSGE models (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2010495219500076

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