Thresholds in the Process of International Financial Integration

By M. Ayhan Kose, Eswar S. Prasad, Ashley D. Taylor. Social Science Research Network, 2009

407 citations recorded by the source corpus.

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. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find 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. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/02b2ddc295f2f7ba16ab6414c2d72dc0fa3bdad2

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Citations in the corpus

Corporate governance quality and financial leverage: Evidence from China (2020, background): “We likewise estimate the expected value of corporate governance quality following Kose et al. (2009) and find that it is difficult to make firms’ financial leverage beneficial for corporate performance in a short term.”
The distributional effects of capital account liberalization (2018, background): “In theory, financial openness should foster international risk-sharing and domestic consumption smoothing (Kose et al. 2009).”
Assessing Measures of Financial Openness and Integration (2011, background): “Kose, Prasad, and Taylor (2011) argue that these benefits should be especially important for developing countries with relatively low capital-to-labor ratios.20 The lack of strong evidence, however, has not been evenly distributed across all indices.”
Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma (2010, positive): “The estimation model for economic growth will be based upon the one used in Kose et al. (2009), namely, OLS with fixed effects and system GMM, and the model for output volatility, inflation volatility, and the level of inflation upon Aizenman et al. (2008), i.e., the robust regression model that…”
Financial Globalization and Economic Policies (2009, neutral): “, Kraay, A., Mastruzzi, M. (2003). “Governance matters III: governance indicators for 1996–2002”.”