Kiel Working Papers, Kiel Institute for World Economics
No 1161:
The Integration of Imperfect Financial Markets: Implications for Business Cycle Volatility
Claudia M. Buch and Christian Pierdzioch
Abstract: During the last two decades, the degree of openness of
national financial systems has increased substantially. At the same time,
asymmetries in information and other financial market frictions have remain
prevalent. We study both empirically and theoretically the implications of
the opening up of national financial systems in the presence of financial
market frictions for business cycle volatility. In our empirical analysis,
we demonstrate that stylised facts suggest that countries with more
developed financial systems have lower business cycle volatility. Financial
openness has no strong impact on business cycle volatility, in contrast. In
our theoretical analysis, we use a dynamic general equilibrium model to
study the implications of the opening up of national financial markets and
of financial market frictions for business cycle volatility. We find that
the implications of opening up national financial markets for business
cycle volatility are largely unaffected by the presence of financial market
frictions.
Keywords: Business cycle volatility; Financial frictions; Financial market integration; (follow links to similar papers)
JEL-Codes: F31; F32; F36; F41; E44; (follow links to similar papers)
41 pages, April 2003
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