The Effects of International Financial Integration on Macroeconomic Volatility in Iran: A Stochastic Volatility Model Approach

Document Type : Original Article


1 Assistant Professor of Economics, School of Humanities, University of Bojnord, Iran

2 Ph.D Candidate in Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran



The main purpose of this paper is to examine the effects of financial integration on macroeconomic volatility in Iran. Economic theories do not clearly explain the effects of financial integration on macroeconomic volatility and this is essentially an empirical problem. Hence, we have presented an empirical model to test the effect of international financial integration on macroeconomic volatility in Iran over the period 1973-2016. For this purpose, first, the macroeconomic uncertainty was extracted using stochastic volatility model with leverage effects and using the principal component analysis method. The results show that in the long run, international financial development, international financial integration, and terms of trade volatility have a positive effect on macroeconomic volatility in Iran, while the effect of trade openness on macroeconomic volatility in Iran is negative. In addition, in the short run, there is no significant relationship between the relevant variables and macroeconomic volatility.


Abrishami, H., Mehrara, M., & Seyed Shokri, KH. (2010). Financial Integration and Macroeconomic Volatility in Oil Exporting Developing Countries. Quarterly Energy Economics Review, 6(23), 121-135 (In Persian).
- Aghaei, M., Kouhbor, M. A., & Ahmadinejad, H. (2018). Financial Stability and Economic Performance: The Case of OPEC Countries. Journal of Economics and Modelling, 9(2), 29-65 (In Persian).
- Aghion, P., A. Banerjee, & T. Piketty. (1999). Dualism and Macroeconomic Volatility. Quarterly Journal of Economics, 114, 59-97.
- Ahmed, D. Abdullahi, & Suardi, S. (2009). Do financial and trade liberalisation cause macroeconomic volatility in sub-Saharan Africa? Working Paper No. 44, Melbourne: Centre for Strategic Economic Studies, Victoria University.
- Barro, R.J., & Sala-i-Martin, X. (2003). Economic Growth. MacGraw Hill Companies, 285-313.
- Bauwens, L., Hafner, C. M., & Laurent, S. (2012). Handbook of Volatility Models and Their Applications (Vol. 3). John Wiley and Sons.
- Baxter, M., & Crucini, M. (1995). Business cycles and the assets structure of foreign trade. International Economic Review, 36(4), 82–154.
- Bekaert, G., Harvey, Campbell R., & Lundblad, C. (2004). Does financial liberalization spur growth? Journal of Financial Economics, 77(1), 3–55.
- Buch, M.C., Dopke, J., & Pierdzioch, C. (2002). Financial openness and business cycle volatility. Kiel Working Paper No. 1121, Kiel, Germany: Kiel Institute for World Economics.
- Caballero, R.J., & Krishnamurthy, A. (2001). International and Domestic Collateral Constraints in a Model of Emerging Market Crises. Journal of Monetary Economics, 48, 513-48.
- Demirgüç-Kunt, A., & Detragiache, E. (2001). Financial liberalization and financial fragility. In G. Caprio, P. Honohan & J. Stiglitz (Eds), Financial liberalization how far, how fast (pp. 96–123). Cambridge, UK: Cambridge University Press.
- Fan, P., Hamid, M., & Neumann, R. (2014). Financial Integration, Macroeconomic Volatility, and the Directions of Capital Flows.
- Hirata, H., Kim, H., & Kose, A. (2004). Integration and fluctuations: The case of MENA. Emerging Markets Finance & Trade, 40(6), 48–67.
- Kari, G. (2004). Financial integration and macroeconomic volatility in the ECCU. Proceedings of the 36th Annual monetary studies conference, 1-29.
- Khadraoui, N. (2010). Financial integration and growth volatility: The threshold effect of financial development. University of Sousse-TUNISIA, the Faculty of Law and Economics and Political Science of Sousse. Retrieved 15 March 2016.
- King, G.R., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717–37.
- Kose, M. Ayhan., & Kei-Mu, Y.i. (2001). International Trade and Business Cycles: Is Vertical Specialization the Missing Link? American Economic Review, Papers and Proceedings, 91, 371–375.
- Kose, M.A., Prasad, E.S., & Terrones, M.E. (2003). Financial integration and macroeconomic volatility (Special Issue). IMF Staff Papers, 50(S1), 119-42.
- Krugman, P. (1993). Lessonsof Massachusettsfor EMU.In the Transitionto Economic and Monetary Union in Europe, ed. by F. Giavazzi and F. Torres Cambridge University Press, 241-61.
- Lane, P. (2001). The New Open Economy Macroeconomics: a Survey. Journal of International Economics, 54, 235-66.
- Lensink, R., & Morrissey, O. (2006). Foreign direct investment: Flows, volatility and impact on growth in developing countries. Review of International Economics, 14(3), 1-32.
- Mastern, A., & Coricelli, F. (2010). Financial Integration and Financial Development in Transition Economic: What Happens During Financial Crises? Working Paper Series, No. 1955, 1-25
- Mendoza, E.G. (1994). The obustness of macroeconomic indicators of capital mobility. In L. Leiderman & A. Razin (Eds), Capital mobility: The impact on consumption, investmentand growth (pp. 83–111). Cambridge, UK: Cambridge University Press.
- Motameni, M., & Ariyani, F. (2013). Financial Integration and Economic Volatility in OPEC Countries. Quarterly Journal of the Economic Development Research, 3(10), 97-108 (In Persian).
- Mougani, G. (2012). An Analysis of the Impact of Financial Integration on Economic Activity and Macroeconomic Volatility in Africa within the Financial Globalization Contexts. Development Research Department of the African Development Bank (WPS), Working Paper No. 144.
- Neaime, S. (2004). Financial market integration and macroeconomic volatility in the MENA region: An empirical investigation. Working Paper No. 0431, Beirut, Lebanon: Department of Economics/Institute of Financial Economics, American University of Beirut.
- Obstfeld, M., & Rogoff, K. (1995). Exchange Rate Dynamics Redux. Journal of Political Economy, 103, 24-60.
- Razin, A., & Rose, A. (1992). Business cycle volatility and openness: An exploratory cross section analysis. Working Paper No. 4208, US: National Bureau of Economic Research.
- Sarno, L. (2001). Toward a New Paradigmin Open Economy Modeling: Where Do We Stand? Review of Federal Reserve Bank of St Louis, 83, 21-36.
- Senay, O. (1998). The effects of goods and financial market integration on macroeconomic volatility. The Manchester School Supplement, 66(S), 39–61.
- Spiegelhalter, D., Thomas, A., Best, N., & Lunn, D. (2003). Winbugs User Manual. Congdon, P. (2006). Bayesian Statistical Modelling. John Wiley & Sons Ltd.
- Spiliopoulus, L. (2010). The determinants of macroeconomic volatility: A Bayesian model averaging approach. MPRA Paper No. 26832, 1-34.
- Sutherland, A. (1996). Financial market integration and macroeconomic volatility. Scandinavian Journal of Economics, 98(4), 129–539.