On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility

Rajmund Mirdala (), Aneta Svrčeková and Jozefína Semančíková

MPRA Paper from University Library of Munich, Germany

Abstract: Effects of international financial integration on the volatility of the total output and its main components have been a subject of rigorous academic discussion for decades. Even nowadays recent empirical literature suggests that its long-term benefits on economic growth are associated with spurious and vague side effects in terms of macroeconomic volatility. This paper examines the relationship between international financial integration and output fluctuation. An analysis was conducted on a large sample of developed and developing countries over the past 40 years. We follow the approach employed by Kose et al. (2003) and use cross-sectional median of financial liberalization to subdivide developing economies into two groups: more financially liberalized (MFL) and less financially liberalized (LFL) economies. Our results indicate that while the volatility of output growth rates experienced a decreasing trend over time, financial integration had a significant contribution to output fluctuations. However, the relationship was stronger in developing countries.

Keywords: financial integration; financial liberalization; output volatility; consumption volatility; capital flows (search for similar items in EconPapers)
JEL-codes: E44 F36 F41 G15 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-fdg, nep-ger and nep-mac
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Published in Journal of Applied Economic Sciences 2.10(2015): pp. 552-570

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