Financial Integration, Volatility of Financial Flows and Macroeconomic Volatility

Macroeconomic instability is usually associated with increased short-term volatility in key fundamental variables. The recent literature that empirically examines implications of the macroeconomic volatility provides strong evidence of its negative growth effects. Stable macroeconomic environment represents a substantial fundamental pillar of a long-term economic growth. International financial integration as one of the phenomenon of last few decades still differentiate economists examining its direct and side effects on macroeconomic performance and volatility. In the paper we examine the relationship between international financial integration, volatility of financial flows and macroeconomic volatility. Examination of the international financial integration and its effects on macroeconomic volatility or stability is particularly important due to existence of generally expected positive relationship between macroeconomic volatility and economic growth, common trends of decreased macroeconomic instability worldwide and occurrence of negative sides of financial integration - financial crises. Following our results we suggest that relationship between financial integration, volatility of financial flows and macroeconomic volatility is positive, however not significant. Moreover the relationship is stronger in case of developing countries.