Does Openness to International Financial Flows Raise Productivity Growth?

46 Pages Posted: 23 Jan 2009  

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

Marco E. Terrones

International Monetary Fund (IMF)

M. Ayhan Kose

Development Prospects Group at the World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2009

Abstract

Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. This paper provides a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries. We find that de jure capital account openness has a robust positive effect on TFP growth. The effect of de facto financial integration on TFP growth is less clear, but this masks an important and novel result. We find strong evidence that FDI and portfolio equity liabilities boost TFP growth while external debt is actually negatively correlated with TFP growth. The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions.

Keywords: global economics, financial markets, economic development, globalization, financial openness

Suggested Citation

Prasad, Eswar S. and Terrones, Marco E. and Kose, M. Ayhan, Does Openness to International Financial Flows Raise Productivity Growth? (January 22, 2009). Brookings Global Economy and Development Working Paper No. 32. Available at SSRN: https://ssrn.com/abstract=1331615 or http://dx.doi.org/10.2139/ssrn.1331615

Eswar S. Prasad (Contact Author)

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

440 Warren Hall
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HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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NBER ( email )

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IZA Institute of Labor Economics

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Marco E. Terrones

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

M. Ayhan Kose

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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