Article

How do trade and financial integration affect the relationship between growth and volatility?

International Monetary Fund, Research Department, Washington, DC 20431, United States
Journal of International Economics 03/2005; DOI: 10.1016/j.jinteco.2005.05.009
Source: RePEc

ABSTRACT The influential work of Ramey and Ramey [Ramey, G., Ramey, V.A., 1995. Cross-country evidence on the link between volatility and growth. American Economic Review 85, 1138–1151 (December).] highlighted an empirical relationship that has now come to be regarded as conventional wisdom—that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization—a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. Using a comprehensive new data set, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship. Specifically, we find that, in a regression of growth on volatility and other controls, the estimated coefficient on the interaction between volatility and trade integration is significantly positive. We find a similar, although less robust, result for the interaction of financial integration with volatility.

0 Bookmarks
 · 
60 Views
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We define a country's beta as the covariance of domestic consumption growth with world consumption growth scaled by the world's variance. Beta is related to a country's risk-taking position in models of international financial integration. Empirically, we find that an increase in beta leads to an increase in average consumption growth. This beta-growth relationship is present only among countries with high levels of financial openness, and is absent among the rest. However, we cannot fully discard the presence of non-financial factors (e.g., trade openness) as determinants of the beta-growth relationship.
    Journal of International Money and Finance 01/2011; 30(6):999-1018. · 1.02 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets.
    12/2007;
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We define a country's beta as the covariance of domestic consumption growth with world consumption growth scaled by the world's variance. We find that an increase in beta leads to an increase in average consumption growth. Unlike beta, higher domestic consumption volatility has a negative effect on growth. In a portfolio model with incomplete markets we relate beta to the country's international risk-taking position. Empirically, we find that high-beta countries are more financially integrated than low-beta countries, and have particularly high levels of foreign liabilities. However, it is unlikely that financial risk-taking is the only explanation for variation in beta.

Full-text (4 Sources)

View
64 Downloads
Available from
May 16, 2014