Consumption Volatility and Financial Openness

Economic theory predicts that the integration of financial markets lowers the volatility of consumption. In this paper, we study long-term trends in the consumption volatility of the G7 countries. Using different measures of financial openness, we find that greater financial openness has been associated with lower consumption volatility in Canada and Italy. In France, Germany, Japan, and the UK, consumption volatility has declined following equity market liberalization but not following capital account liberalization as such.