How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility?

Ayhan Kose, Eswar Prasad and Marco Terrones

No 2252, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom – that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization – a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. Using a comprehensive new dataset, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship. Specifically, we find that the estimated coefficient on the interaction between volatility and trade integration is significantly positive. We find a similar, although less significant, result for the interaction of financial integration with volatility.

Keywords: macroeconomic volatility and growth; international trade and financial linkages; globalization (search for similar items in EconPapers)
JEL-codes: F15 F36 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006-08
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-fmk
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Citations: View citations in EconPapers (126)

Published - published in: Journal of International Economics, 2006, 69 (1), 176-202

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Related works:
Journal Article: How do trade and financial integration affect the relationship between growth and volatility? (2006)
Working Paper: How Do Trade and Financial Integration Affect the Relationship Between Growth and Volatility? (2005)
Journal Article: How do trade and financial integration affect the relationship between growth and volatility? (2004)
Working Paper: How do trade and financial integration affect the relationship between growth and volatility (2004)
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