Authors: Lathaporn Ratanavararak
Addresses: Faculty of Economics, Chulalongkorn University, Phayathai Road, Pathumwan, Bangkok 10330, Thailand
Abstract: This paper investigates the combined effect of financial integration (FI) and trade integration (TI) on macroeconomic volatility and business cycle synchronisation (BCS) in emerging markets. The study adopts a two-country real business cycle model with the adjustment cost of foreign asset holding, domestic leverage constraint and asymmetric financial accessibility. The results reveal that the impacts of FI and TI are intertwined. Increasing foreign asset holding generally has a weaker impact at high trade intensity. People with restricted financial access face large consumption volatility from increased FI under low trade. The findings suggest that trade could help mitigate the negative effect of FI on consumption smoothing, and FI could help lower output fluctuation and dependence on foreign economies, while trade increases them.
Keywords: financial integration; trade integration; business cycles; EMEs; emerging market economies; macroeconomic volatility; BCS; business cycle synchronisation; financial access; RBC model.
International Journal of Monetary Economics and Finance, 2018 Vol.11 No.3, pp.215 - 223
Received: 20 Sep 2016
Accepted: 15 Oct 2016
Published online: 23 Jul 2018 *