Financial Globalization: A Reappraisal

94 Pages Posted: 3 Oct 2006

See all articles by M. Ayhan Kose

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2006

Abstract

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels and with a variety of apparently conflicting results. For instance, there is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. 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, in terms of both 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: Capital Account Liberalization, Financial Integration, Growth and Volatility, Financial Crises, Developing Countries

JEL Classification: F02, F21, F36, F4

Suggested Citation

Kose, M. Ayhan and Prasad, Eswar S. and Rogoff, Kenneth S. and Wei, Shang-Jin, Financial Globalization: A Reappraisal (August 2006). IMF Working Paper No. 06/189, Available at SSRN: https://ssrn.com/abstract=934448

M. Ayhan Kose (Contact Author)

World Bank ( email )

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Brookings Institution ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

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Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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IZA Institute of Labor Economics

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Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

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Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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