The Two-Sided Effect of Financial Globalization on Output Volatility

This paper provides evidence for a significant relation between international financial markets integration and output volatility. In the framework of a threshold model, it is empirically shown that this relation depends on the financial risk of a country. Financial risk is defined as the ability of a country to pay its official, commercial and trade debts. In countries with low financial risk, financial openness decreases output volatility while financial openness increases output volatility in countries with high financial risk. Extensive robustness checks confirm this result