Working Paper: NBER ID: w10942
Authors: Eswar Prasad; Kenneth Rogoff; Shangjin Wei; M. Ayhan Kose
Abstract: This paper provides a comprehensive assessment of empirical evidence about the impact of financial globalization on growth and volatility in developing countries. The results suggest that it is difficult to establish a robust causal relationship between financial integration and economic growth. Furthermore, there is little evidence that developing countries have been consistently successful in using financial integration to stabilize fluctuations in consumption growth. However, we do find that financial globalization can be beneficial under the right circumstances. Empirically, good institutions and quality of governance are crucial in helping developing countries derive the benefits of globalization. Similarly, macroeconomic stability appears to be an important prerequisite for ensuring that financial globalization is beneficial for developing countries. Finally, countries that employ relatively flexible exchange rate regimes and succeed in maintaining fiscal discipline are more likely to enjoy the potential growth and stabilization benefits of financial globalization.
Keywords: financial globalization; economic growth; macroeconomic volatility; developing countries
JEL Codes: F15; F36; F41; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Globalization (F65) | Economic Growth (O49) |
| Financial Globalization (F65) | Consumption Volatility (E21) |
| Good Governance (G38) | Benefits from Financial Globalization (F65) |
| Macroeconomic Stability (E63) | Benefits from Financial Globalization (F65) |
| Financial Globalization (F65) | Economic Instability (E32) |