Working Paper: CEPR ID: DP7117
Authors: Ayhan Kose; Eswar Prasad; Kenneth Rogoff; Shangjin Wei
Abstract: We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable tensions inherent in evaluating the risks and benefits associated with financial globalization. In light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but as part of a broader package of reforms and supportive macroeconomic policies.
Keywords: capital account liberalization; financial globalization
JEL Codes: F2; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policies promoting financial sector development (O16) | benefits from financial globalization (F65) |
| policies promoting institutional quality (I24) | benefits from financial globalization (F65) |
| policies promoting trade openness (F13) | benefits from financial globalization (F65) |
| sound macroeconomic policies (E60) | beneficial financial integration (F30) |
| excessive reliance on fixed exchange rate regimes (F33) | financial crises in emerging markets (F65) |
| moving to more flexible exchange rate regimes (F33) | alleviate risks associated with financial integration (F65) |
| government debt issues (H63) | likelihood to benefit from financial globalization (F30) |
| current account surplus (F32) | growth rate (O40) |