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Gradual financial integration and macroeconomic fluctuations in emerging market economies: evidence from China

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  • Yong Ma

    (Renmin University of China
    Renmin University of China)

  • Yiqing Jiang

    (Renmin University of China)

Abstract

This paper extends the conventional DSGE literature by developing a New Keynesian DSGE model featuring imperfect financial markets with various friction costs, which allows for the study of macroeconomic dynamics under different levels of financial integration. We conduct Bayesian estimation and draw implications on the macroeconomic effects of gradual financial integration using the Chinese economy as an example. We find that macroeconomic fluctuations vary with different levels of financial integration and the specific relationship depends on the nature of exogenous shocks. Variance decomposition analysis shows that as financial integration increases, the contribution of foreign exchange shocks declines while that of domestic shocks increases. We also find that there is a notable enhancement of welfare associated with improvement in financial integration, and the effectiveness of monetary policy in emerging market economies would be weakened as financial integration increases.

Suggested Citation

  • Yong Ma & Yiqing Jiang, 2023. "Gradual financial integration and macroeconomic fluctuations in emerging market economies: evidence from China," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(2), pages 275-310, April.
    • Handle: RePEc:spr:jeicoo:v:18:y:2023:i:2:d:10.1007_s11403-022-00368-3
    DOI: 10.1007/s11403-022-00368-3
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    More about this item

    Keywords

    Financial integration; Emerging market; Macroeconomic fluctuations;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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