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Financial Integration and International Dynamics: The Role of Volatility Shocks
Version 1
: Received: 19 October 2023 / Approved: 19 October 2023 / Online: 20 October 2023 (03:54:17 CEST)
A peer-reviewed article of this Preprint also exists.
Tang, A. Financial Integration and International Dynamics: The Role of Volatility Shocks. Mathematics 2023, 11, 4742. Tang, A. Financial Integration and International Dynamics: The Role of Volatility Shocks. Mathematics 2023, 11, 4742.
Abstract
This study investigates the impact of financial integration on international dynamics from the perspective of volatility shocks. To achieve this, I employ an IRBC model with time-varying volatilities, recursive preferences, and a global bank. The model demonstrates that volatility shocks trigger precautionary saving incentives, but the specific effects vary based on the type of shock. In the presence of productivity volatilities, countries with a higher level of financial integration exhibit greater divergence in their business cycles, while financial integration tends to result in more synchronized business cycles in the face of financial volatilities. Disregarding volatility shocks would underestimate the impact of financial integration on the comovement of business cycles across countries. Furthermore, welfare analysis also indicates that financial markets play a crucial role in enhancing social welfare, regardless of the type of volatility.
Keywords
Financial Integration; Volatility Shocks; Business Cycle Comovement
Subject
Business, Economics and Management, Economics
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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