Abstract
PurposeMany developing countries are pursuing policies that foster international financial integration after decades of financial repression. Greater access to foreign financial markets may have both positive and negative impact on the performance of the economy. One of the concerns of international financial integration is macroeconomic volatility which may affect both monetary and real sectors. Zimbabwe has chosen to pursue a financial liberalization strategy in the form of imperfect financial integration following periods of excessive domestic shocks. An upsurge of capital flows since the epic of economic crisis in the 2000s has been observed with varying macroeconomic impacts. This study empirically examines the impact of partial international financial integration on the volatility of macroeconomic variables.Design/methodology/approachThe study utilized an ARDL Model suggested by Pesaran et al., (2003) which is appropriate for short time periods.FindingsThe results show that financial integration has a negative effect on output volatility while insignificant on consumption volatility.Practical implicationsThe study recommends that the country should gradually liberalize the capital account and properly sequence financial development reforms in order to minimize losses from global financial integration.Originality/valueThe study used time series for Zimbabwe during a period of external imbalance, repeated economic cycles, sudden stops in capital flows and limited scope of imperfect financial integration. Findings in such an economy will be a referral for policymakers in other economies that would want to pursue international financial integration.
Highlights
Most developing countries were reluctant to liberalise capital accounts, in face of growing calls for financial globalisation, most changed stance in order to capitalise on excess liquidity in advanced and emerging markets
This study examines the impact of international financial integration on macroeconomic volatility of key variables such as consumption and output using the ARDL cointegration as method of econometric analysis
This study investigates the effects of partial financial integration on macroeconomic volatility in particular output and consumption growth
Summary
Most developing countries were reluctant to liberalise capital accounts, in face of growing calls for financial globalisation, most changed stance in order to capitalise on excess liquidity in advanced and emerging markets. Policy redirection towards relaxing capital controls has been observed. This impetus in policy shift is motivated by the predictions of standard theoretical models of international finance which suggest that financial integration generally cause a decline in the relative volatility of consumption and other main macroeconomic variables. Most countries are concerned of macroeconomic volatility as it increases uncertainties in operating environment which distorts the efficient allocation of economic resources and renders macroeconomic policies ineffective. Increased capital mobility has helped to finance the saving-investment gap and consumption which seemed to be erratic for developing countries. In contemporary times, the nexus between international financial integration and economic growth continues to be one of the most
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