Benefits and Costs of International Financial Integration : Theory and Facts
The author provides a selective review of the recent analytical and empirical literature on the benefits and costs of international financial integration. He discusses the impact of financial openness on consumption, investment, and growth, and the...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/10/1620927/benefits-costs-international-financial-integration-theory-facts http://hdl.handle.net/10986/19503 |
| Summary: | The author provides a selective review
of the recent analytical and empirical literature on the
benefits and costs of international financial integration.
He discusses the impact of financial openness on
consumption, investment, and growth, and the impact of
foreign bank entry on the domestic financial system.
Consistent with some recent studies, the author argues that
financial integration must be carefully prepared and managed
to ensure that the benefits outweigh the short-run risks.
Prudent macroeconomic management, adequate supervision and
prudential regulation of the financial system, greater
transparency, and improved capacity to manage risk in the
private sector are important requirements for coping with
potentially abrupt reversals in pro-cyclical, short-term
capital flows. The author adopts a more skeptical view than
some assessments in two areas, however. First, only foreign
direct investment appears to provide dynamic gains and
improved prospects for growth; the evidence on the benefits
of other types of capital flows remains weak. Second,
empirical research on the net benefits associated with
foreign bank penetration is far from conclusive; in
particular, the possibility that such penetration may lead
to adverse changes in the allocation of credit among
domestic firms cannot be dismissed on the basis of the
existing evidence. |
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