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Financial Integration, Macroeconomic Volatility and Welfare

Martin Evans and Viktoria Hnatkovska ()
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Martin Evans and Viktoria Hnatkovska: Department of Economics, Georgetown University,

Authors registered in the RePEc Author Service: Martin Evans () and Viktoria V. Hnatkovska ()

Working Papers from Georgetown University, Department of Economics

Abstract: This paper studies the effects of financial integration on macroeconomic volatility and welfare. We examine a two-sector (tradable and nontradable), twocountry world economy with production in which both stocks and bonds are traded internationally, but markets are incomplete. The effects of integration are examined by comparing the equilibrium properties of the model under three financial configurations: autarky, low integration and high integration. The model predicts a non-monotonic relationship between the degree of financial integration and the volatility of several macroeconomic variables. Greater integration is initially associated with more volatile consumption and output, but as integration proceeds further volatility declines. We also find that while increased integration allows for significantly greater risk-sharing between countries, the improvement in welfare can be very small.

Keywords: Globalization; Incomplete Markets; Volatility; Welfare (search for similar items in EconPapers)
JEL-codes: D52 F36 G11 (search for similar items in EconPapers)
Date: 2006-06-13
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