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How do Trade and Financial Integration Affect the Relationship between Growth and Volatility

IZA Discussion Paper No. 2252

IMF Working Paper No. 05/19

FRB of San Francisco Working Paper No. 2004-29

44 Pages Posted: 8 Sep 2006  

M. Ayhan Kose

Development Prospects Group at the World Bank

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Marco E. Terrones

International Monetary Fund (IMF)

Date Written: August 2006

Abstract

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 dataset, 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 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.

Keywords: globalization, international trade and financial linkages, macroeconomic

JEL Classification: F41, F36, F15

Suggested Citation

Kose, M. Ayhan and Prasad, Eswar S. and Terrones, Marco E., How do Trade and Financial Integration Affect the Relationship between Growth and Volatility (August 2006). IZA Discussion Paper No. 2252; IMF Working Paper No. 05/19; FRB of San Francisco Working Paper No. 2004-29. Available at SSRN: https://ssrn.com/abstract=700747

M. Kose (Contact Author)

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Eswar Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Marco Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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