Working Paper: NBER ID: w12484
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: financial globalization; developing countries; capital flows; economic growth; macroeconomic 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 (F30) | benefits for developing countries (O19) |
| financial globalization (F30) | improved domestic financial sector development (O16) |
| financial globalization (F30) | better governance (H11) |
| financial integration (F30) | growth (O40) |
| financial integration does not robustly predict growth when controlling for other determinants (F30) | growth (O40) |
| financial globalization (F30) | consumption growth volatility (E20) |
| capital account liberalization does not increase vulnerability to financial crises (F32) | vulnerability to financial crises (F65) |
| financial globalization (F30) | contingent benefits based on domestic institutions and policies (F55) |