Working Paper: CEPR ID: DP5842
Authors: Ayhan Kose; Eswar Prasad; Kenneth Rogoff; Shangjin Wei
Abstract: The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. We attempt to provide a unified conceptual framework for organizing this vast and growing literature. This framework allows us to provide a fresh synthetic perspective on the macroeconomic effects of financial globalization, both in terms of growth and volatility. Overall, our critical reading of the recent empirical literature is that it lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances. On the other hand, there is little systematic evidence to support widely-cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises.
Keywords: capital account liberalization; developing countries; financial crises; financial integration; growth; volatility
JEL Codes: F02; F21; F36; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Globalization (F65) | Growth Benefits (O40) |
| Financial Globalization (F65) | Improved Domestic Financial Sectors (O16) |
| Improved Domestic Financial Sectors (O16) | Growth Benefits (O40) |
| Financial Globalization (F65) | Improved Governance Structures (G38) |
| Improved Governance Structures (G38) | Growth Benefits (O40) |
| Financial Integration (F30) | Volatility of Consumption Growth (E21) |
| Volatility of Consumption Growth (E21) | Risk-sharing Benefits (D16) |