How Do Trade and Financial Integration Affect the Relationship Between Growth and Volatility?

By Eswar S Prasad, Marco Terrones, Ayhan Kose

January 1, 2005

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Eswar S Prasad, Marco Terrones, and Ayhan Kose. How Do Trade and Financial Integration Affect the Relationship Between Growth and Volatility?, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The influential work of Ramey and Ramey (1995) 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 significant, result for the interaction of financial integration with volatility.

Subject: Capital flows, Financial integration, Production growth, Trade integration, Trade liberalization

Keywords: Coefficient, Country, Economy, Liberalization, Trade, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/019
Stock No:

WPIEA2005019
ISBN:

9781451860382
ISSN:

1018-5941

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