Financial integration, global liquidity and global macroeconomic linkages

What is it about?

The aim of this paper is to analyse the effect of financial integration on several macroeconomic variables from a global perspective. We apply a cointegrated VAR model using quarterly data for 1980 to 2009. Analysing the interactions of globally aggregated measures capturing cross-border financial transactions, monetary liquidity, output, consumer and commodity prices, we focus on the dissection of short-run and long-run dynamics. We find that increasing financial integration has a positive impact driving GDP. We also find evidence of two-way causality between commodity prices and financial flows. Our results suggest that commodity prices are driven by financial integration and the gap between the dynamics of commodity prices and financial flows is closed by global liquidity injected by central banks. The paper contributes to the empirical literature by analysing the overall impact of global financial integration and of global liquidity on global macroeconomic variables in a unified framework.

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