Up till now,the literature on the relationship between financial openness and macroeconomic and financial stability not only lacks micro foundations but also yields mixed empirical results.This paper introduces financial openness into the Dynamic Stochastic General Equilibrium (DSGE) model,which aims to provide a micro-founded framework for analyzing the endogenous relationship between financial openness,economic volatility and financial volatility.Our model simulation analysis shows that,as the level of financial openness increases,financial volatility would be significantly larger while the increase in output volatility is very small.This conclusion is further confirmed by the empirical analysis based on quarterly data of the Chinese economy over the period 1998-2015:while there is a significantly positive relationship between financial openness and financial volatility,the positive relationship between financial openness and output volatility turns out to be not significant.This result is proved to be valid across various robustness tests,giving additional credibility of the main conclusion of the paper.
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