DP6301 International Financial Remoteness and Macroeconomic Volatility

Author(s): Andrew K Rose, Mark Spiegel
Publication Date: May 2007
Keyword(s): business cycle, capital, cross-section, data, distance, empirical, proximity
JEL(s): E32, F32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6301

This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.