Effects Of Financial Integration Research Articles

Financial Integration and Macroeconomic Volatility

This paper examines the impact of international financial integration on macroeconomic volatility. Economic theory does not provide a clear guide to the effects of financial integration on volatility, implying that this is essentially an empirical question. We provide a comprehensive examination of changes in macroeconomic volatility in a large group of industrial and developing economies over the period 1960-99. We report two major results: First, while the volatility of output growth has, on average, declined in the 1990s relative to the three earlier decades, we also document that, on average, the volatility of consumption growth relative to that of income growth has increased for more financially integrated developing economies in the 1990s. Second, increasing financial openness is associated with rising relative volatility of consumption, but only up to a certain threshold. The benefits of financial integration in terms of improved risk-sharing and consumption smoothing possibilities appear to accrue only beyond this threshold.

Capital Mobility In A Second–Best World: Moral Hazard With Costly Financial Intermediation

The paper studies financial integration in the presence of moral hazard, where banks may mitigate excessive risk by costly monitoring. The author shows that a drop in banks’ cost of funds, less efficient intermediation technology, higher macroeconomic volatility, and a more generous deposit insurance raise the riskiness of projects in a competitive equilibrium. Overborrowing would arise even in the absence of deposit insurance in circumstances where the cost of risk monitoring is high, the banks’ cost of funds is relatively low, and macroeconomic volatility is high. Reforming an inefficient banking system and improving its operation is a precondition for successful financial integration.

Financial Integration and Macroeconomic Volatility

This paper examines the impact of international financial integration on macroeconomic volatility. Economic theory does not provide a clear guide to the effects of financial integration on volatility, implying that this is essentially an empirical question. We provide a comprehensive examination of changes in macroeconomic volatility in a large group of industrial and developing economies over the period 1960-99. We report two major results: First, while the volatility of output growth has, on average, declined in the 1990s relative to the three earlier decades, we also document that, on average, the volatility of consumption growth relative to that of income growth has increased for more financially integrated developing economies in the 1990s. Second, increasing financial openness is associated with rising relative volatility of consumption, but only up to a certain threshold. The benefits of financial integration in terms of improved risk-sharing and consumption-smoothing possibilities appear to accrue only beyond this threshold.

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Even though a deeper financial integration and higher economic and financial stability are the prime goals of many Asian policymakers, no researcher has studied the relationship between integration and (in)stability in Asia. To fill this gap in the literature, this paper investigates the causality between financial integration and macroeconomic and financial instability. To this end, we use the Generalized Method of Moments to estimate a set of dynamic panel data models for a block of Asian countries over the period 2000–2017. Our estimation results show that there is a bidirectional causal relationship between financial integration and instability in Asia. Moreover, we find that financial integration causes instability in output and credit markets. The overall results show that macroeconomic and financial instability in Asia leads to financial disintegration. More specifically, the volatilities of the exchange rate and output growth cause financial fragmentation. Furthermore, we underscore the role of coordinated fiscal and monetary policies in offsetting the adverse effect of financial integration on macroeconomic and financial stability in Asia. Finally, the global financial crisis of 2008 has increased financial disintegration and instability in Asia. Our findings might help Asian policymakers to choose their policy targets when integrating into the global financial system.

International investment in a model of stochastic growth and development traps

This paper investigates the effects of financial integration in a stochastic endogenous growth model of two economies in which heterogeneous agents face fixed costs of productive investment. The removal of investment barriers may enable a poor country to escape from a state of low and unstable growth by leading to large capital inflows and by raising the number of agents who invest in productive capital. However, since the two economies are characterized by increasing returns to capital and since financial integration may lower the saving rate, it is also possible that both countries' growth prospects worsen.

Optimal seigniorage and financial liberalization

This paper analyzes the effect of financial integration for countries relying on the taxation of their domestic financial system. A two-country model with overlapping generations and explicit financial intermediation is used. Goverments derive revenues from seigniorage and set optimally, but non-cooperatively, the rate of inflation and the level of required reserves on bank deposits. A financial liberalizations leads to lower reserve ratios, higher inflation rates, and larger stocks of government debt. When the liberalization is anticipated, governments may temporarily increase the reserve ratios before the liberalization occurs. (JEL F30, E60)