Does Financial Globalization Induce Better Macroeconomic Policies?

By Shang-jin Wei, Irina Tytell. Social Science Research Network, 2004

123 citations recorded by the source corpus.

Monetary and fiscal policies around the world are in better shape today than two decades ago. This paper studies whether financial globalization has helped induce governments to pursue better macroeconomic policies (the "discipline effect"). The empirical tests have two innovations. First, we recognize potential endogeneity of the observed capital flows in a given country and employ an instrumental variable approach that relies on the autonomous (global) component of the capital flows. Second, we recognize inherent discreteness in defining good versus bad macroeconomic policies and use a transition matrix technique to determine whether capital flows are effective in inducing substantial qualitative policy shifts. Our results suggest that, in spite of the plausibility of the "discipline effect" in theory, it is not easy to find strong and robust causal evidence. There is some evidence that financial globalization may have induced countries to pursue low-inflation monetary policies. However, there is no evidence that it has encouraged low budget deficits.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/20f789568bc03160e86c81d3bf2563362bed1c6a

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Citations in the corpus

Globalization and global disinflation (2003, methodology): “Chart 4 sorts countries’ exchange rates regimes into five groupings according to the “Natural Classification Scheme” of Reinhart and Rogoff (2004) .”
Financial Globalization and Economic Policies (2009, unknown): “Countries with higher levels of financial openness are more likely to generate better monetary policy outcomes in terms of lower inflation (Tytell and Wei, 2004; Gupta, 2006; Spiegel, 2008).”
Reaping the Benefits of Financial Globalization (2008, background): “Empirical studies suggest that countries with higher levels of financial openness experience lower inflation rates (Tytell and Wei, 2004; and Gupta, 2007), though evidence is more mixed for fiscal policies (Garrett and Mitchell, 2001; and Kim, 2003).”