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International Financial Integration and The Real Economy

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Abstract

What are the consequences of financial integration for the real economy? This paper develops a set of theoretical benchmarks for the link between integration and macroeconomic volatility and welfare. The analysis is conducted in a standard two-sector international real business cycle model in which we introduce dynamic portfolio choice over equities and an international bond. The model predicts an increase in the volatility of output in response to integration, while the relation between integration and consumption volatility is hump-shaped. We also find that financial integration is associated with significant improvement in risk-sharing across countries, although in aggregate the welfare benefits are very small. At the same time, the level of financial integration significantly affects how the welfare benefits of productivity shocks are distributed internationally.

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  • Martin Evans and Viktoria Hnatkovska, 2007. "International Financial Integration and The Real Economy," Working Papers gueconwpa~07-07-11, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~07-07-11
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    Cited by:

    1. Shen, Hewei, 2022. "Financial integration and the correlation between international debt and equity flows," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 537-551, July.
    3. Martin D. D. Evans, 2017. "Order Flows and the Exchange Rate Disconnect Puzzle," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 15, pages 599-643, World Scientific Publishing Co. Pte. Ltd..
    4. Pagano, Marco & Jappelli, Tullio, 2008. "Financial Market Integration Under EMU," CEPR Discussion Papers 7091, C.E.P.R. Discussion Papers.
    5. Feriansyah & Noer Azam Achsani & Tony Irawan, 2018. "The Effect Of Financial Liberalization And Capital Flows On Income Volatility In Asia-Pacific," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 20(3), pages 257-278, January.
    6. Lathaporn Ratanavararak, 2018. "The Impact of Imperfect Financial Integration and Trade on Macroeconomic Volatility and Welfare in Emerging Markets," PIER Discussion Papers 79, Puey Ungphakorn Institute for Economic Research.

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    More about this item

    Keywords

    Globalization; Incomplete Markets; Volatility; Welfare.;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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