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Thresholds in the Process of International Financial Integration

M. Ayhan Kose

International Monetary Fund (IMF)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; Institute for the Study of Labor (IZA)

Ashley D. Taylor

World Bank

April 2009

NBER Working Paper No. w14916

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.

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Date posted: April 29, 2009  

Suggested Citation

Kose, M. Ayhan and Prasad, Eswar S. and Taylor, Ashley D., Thresholds in the Process of International Financial Integration (April 2009). NBER Working Paper No. w14916. Available at SSRN: http://ssrn.com/abstract=1394823

Contact Information

M. Ayhan Kose (Contact Author)
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
202-623-7000 (Phone)
202-623-4661 (Fax)
HOME PAGE: http://ideas.repec.org/e/pko65.html
Eswar S. Prasad
Cornell University - Dyson School of Applied Economics and Management ( email )
440 Warren Hall
Ithaca, NY 14853
United States
HOME PAGE: http://prasad.aem.cornell.edu
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
Brookings Institution ( email )
1775 Massachusetts Ave, NW
Washington, DC 20036
United States
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Ashley D. Taylor
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
Feedback to SSRN

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