Financial Openness and Macroeconomic Volatility

We analyze the implications of financial openness to macroeconomic volatility in a small open economy. The volatility of major macroeconomic aggregates shows non-monotonic pattern with respect to the degree of financial openness in the model without domestic financial frictions. The introduction of domestic financial frictions makes the volatility patterns flatter. Our model explains the lack of empirical evidence on the linkage between financial openness and macro volatility. If the empirical data of countries with different degree of financial openness are pooled, we cannot estimate a significant linear relationship between financial openness and macro volatility, because the underlying relationship is non-monotonic. JEL Classification: E32, E44, F34, F41