Thresholds in the Process of International Financial Integration
The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presume...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20091207085211 http://hdl.handle.net/10986/4342 |
| Summary: | The financial crisis has re-ignited the
fierce debate about the merits of financial globalization
and its implications for growth, especially for developing
countries. The empirical literature has not been able to
conclusively establish the presumed growth benefits of
financial integration. Indeed, a new literature proposes
that the indirect benefits of financial integration may be
more important than the traditional financing channel
emphasized in previous analyses. A major complication,
however, is that there seem to be certain
"threshold" levels of financial and institutional
development that an economy needs to attain before it can
derive the indirect benefits and reduce the risks of
financial openness. This paper develops a unified empirical
framework for characterizing such threshold conditions. The
analysis finds that there are clearly identifiable
thresholds in variables such as financial depth and
institutional quality -- the cost-benefit trade-off from
financial openness improves significantly once these
threshold conditions are satisfied. The findings also show
that the thresholds are lower for foreign direct investment
and portfolio equity liabilities compared with those for
debt liabilities. |
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