Financial Openness and Macroeconomic Instability in Emerging Market Economies

摘要

This paper shows how the macroeconomic instability that affects more financially open emerging economies can be explained in terms of imperfect international financial integration. The analytic tool used is a stochastic dynamic equilibrium model. The model, based on a small open economy, is calibrated to Malaysia. International financial relations are characterized by the presence of a borrowing constraint, that amplifies the volatility of exogenous shocks. Impulse response and simulation analyses are conducted. Main result is that, in presence of international financial frictions, greater access to international liquidity can cause high short-run macroeconomic instability.