Does Financial Integration Reduce Output Volatility? New Evidence from Cross‐Country Data

Sahoo, Pradipta Kumar; Rao, D. Tripati; Rath, Badri Narayan

doi:10.1111/1759-3441.12235

Cited by 9 publications

(4 citation statements)

References 43 publications

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“…In addition, our estimation results reveal that the volatility of the growth rate tends to drop between 0.874 per cent to 4.219 per cent for every 1 per cent increase in financial development (i.e., lnFD t , lnM2 t , lnM3 t , lnPRI t , and lnBC t ). These findings are corroborated with previous studies such as Sahoo et al (2019), Moradbeigi and Law (2016), Ćorić and Pugh (2013), Dabla-Norris and Srivisal 2013, Darrat et al (2005), Denizer et al (2002), Taylor (1994Taylor ( , 1996, Levine (1997), and Bencivenga and Smith (1992). Next, we extend our study to investigate the moderating effect of financial development on the impact of inflation volatility, trade openness and FDI on growth volatility in Malaysia.…”

Section: Methodology and Resultssupporting

confidence: 91%

“…An example of the first strand is the financial accelerator framework engineered by Bernanke et al (1999) and the general equilibrium model of Portes (2007) which claimed that an influx of FDI reduces output volatility because international capital inflows reduce financial constraints for domestic investment which eventually reduces economic volatility. Indeed, the studies of Sahoo et al (2019), and Ćorić and Pugh (2013) also reveal a significant negative relationship between FDI inflows and output volatility in both developed and developing countries. However, the second strand of literature argues that FDI is the cause of high economic fluctuation.…”

Section: Methodology and Resultsmentioning

confidence: 99%

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Does Financial Development Moderate the Effects on Growth Volatility? The Experience of Malaysia

Tang

Abosedra

2020

Margin: The Journal of Applied Economic Research

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This article examines whether financial development can moderate the effects of growth volatility in the Malaysian economy. Using annual data from 1972 to 2018, we noted the existence of a strong link between growth volatility and financial development over the long-run. The findings also indicate that financial development alleviates the incidence of growth volatility over the long-run. Our basic estimated model shows further that trade openness has a significant positive impact on growth volatility, while inflation volatility, inward FDI and financial development have a significant negative impact on growth volatility in Malaysia. This model is extended to count the moderating effects of financial development on the impact of inflation volatility, trade openness and FDI on growth volatility in Malaysia. The results show that financial development not only has a direct impact on growth volatility but it also moderates the impacts of inflation volatility, trade openness and FDI on growth volatility. Therefore, our results extend established findings on the finance-growth volatility nexus for the Malaysian economy. More importantly, it shows additional possible benefits from financial development for growth stability. Furthermore, we note that ignoring such benefits may have contributed to the conflicting empirical results reported in the finance-growth volatility literature. We offer some specific policy implications based on such empirical results that are beneficial to the Malaysian economy and other countries in the region. JEL Classification: C32, E32, O16

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Section: Methodology and Resultssupporting

confidence: 91%

Section: Methodology and Resultsmentioning

confidence: 99%

Does Financial Development Moderate the Effects on Growth Volatility? The Experience of Malaysia

Tang

Abosedra

2020

Margin: The Journal of Applied Economic Research

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“…Ang (2011) suggests that increasing financial openness will lead to reduced consumption volatility in India, and Rangvid et al (2016) find that increased capital market integration helps increase consumption risk-sharing. Most recently, Sahoo et al (2019) find a similar reduction in output volatility for a set of 60 countries.…”

Section: Previous Studies Related To Macroeconomic Volatility and Economic Integrationmentioning

confidence: 71%

Macroeconomic volatility, monetary union, and external exposure: evidence from five Eurozone members

Hegerty

2020

Baltic Journal of Economics

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Membership in a common currency area is thought to promote economic stability by facilitating macroeconomic convergence, but a country might give up important monetary policy tools that could help stabilize its economy following a shock. The effect of a common currency on macroeconomic volatility can therefore be ambiguous. This study examines five Central and Eastern European countries that joined the Eurozone since 2005; their differences, particularly with regard to the countries' economic performance and pre-accession exchange-rate regimes, help drive a unique set of results. Structural breaks in the volatility of real output, consumption, and investment generally correspond to events other than Eurozone accession, and Vector Autoregressive methods show that global shocks have more of an impact on output volatility than do regional shocks or economic openness. Spillovers affect Latvia and Lithuania more than Estonia, Slovakia, or Slovenia, which suggests that a unified currency space might have difficulty managing idiosyncratic shocks.

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“…(Kose et al, 2006;Schindler, 2009;Alagidede et al, 2020). From the literature, the studies of FI observed in the case of Asian countries (Park, 2013;Gan, 2014), the Europen Union (Kose et al, 2006;Hoffmann et al, 2020) and also for the global economy (Razin and Rose, 1994;Sahoo et al, 2019). More importantly, FI and growth are linked, as many studies expressed that the more financially integrated countries are signified with higher growth (Easterly et al, 2001;Kose et al, 2003;Friedrich et al, 2013;Cheng and Quang, 2014).…”

Section: Introductionmentioning

confidence: 99%

A club convergence analysis of financial integration: cross-country evidence

Akram

Singh

Sahoo

2023

SEF

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Purpose The purpose of this study is to examine the club convergence of Financial integration (FI) in the case of 60 countries from 1970 to 2015. FI plays a vital role in economic growth through sharing the risk between countries, cross-border capital association, investment and financial information. It also leads to the efficient allocation of capital and capital accumulation, thereby improving the systematic growth and productivity of the economy. Literature on examining the convergence hypothesis of FI is scarce. Design/methodology/approach This study applies the clustering algorithm to identify club convergence, advanced by the Phillips and Sul test, which enables the identification of multiple steady states or club convergence, unlike beta and sigma convergences. Findings The findings indicate the non-convergence when all 60 countries were taken together. This highlights that the selected countries' have unique transition paths in terms of FI. Hence, the authors implement the clustering algorithm, and the estimation shows that 56 countries are categorised into three different clubs. However, for the rest of four countries, the results are sort of ambiguous, favouring neither convergence nor divergence. Practical implications On the basis of three country clubs, Club 1 presents the model countries such as the Netherlands, Singapore and Switzerland. The Club 2 and Club 3 countries can start making moves towards the model countries by making policy adaptations for trade, finance and business facilitation. Originality/value The existing literature provides a plethora of studies investigating the convergence of stock markets, exchange rates and equity markets, but studies on the convergence of FI, particularly across the countries, are scarce. This study contributes by bridging this gap. The study is unique in its type as it takes into account the multiple steady states or club convergence. This study also contributes in policymaking by suggesting Club 1 countries (the Netherlands, Singapore and Switzerland) as the model ones for the FI.

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Does Financial Integration Reduce Output Volatility? New Evidence from Cross‐Country Data

Cited by 9 publications

References 43 publications

Does Financial Development Moderate the Effects on Growth Volatility? The Experience of Malaysia

Does Financial Development Moderate the Effects on Growth Volatility? The Experience of Malaysia

Macroeconomic volatility, monetary union, and external exposure: evidence from five Eurozone members

A club convergence analysis of financial integration: cross-country evidence

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