Managing Financial Globalization: A Guide for Developing Countries Based on the Recent Literature

20 Pages Posted: 14 Mar 2018

See all articles by Shang-Jin Wei

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: January 31, 2018

Abstract

We seek to draw lessons for developing countries based on a survey of the recent literature on financial globalization. First, while capital account openness holds promises (by potentially generating a lower cost of capital, better risk sharing, and stronger disciplines on policies), they do not always work out that way in the data. Distortions in the domestic financial market, international capital market, domestic labor market, and domestic public governance can make financial globalization less beneficial for developing countries. Second, developing countries sometimes need to insulate themselves from foreign monetary policy shocks. The empirical pattern appears to be somewhere between a trilemma and a dilemma. While nominal exchange rate flexibility is insufficient for policy autonomy, capital flow management may be needed to confer more monetary policy autonomy.

Keywords: financial globalization, monetary policy autonomy, overborrowing, capital flow management

JEL Classification: E42, E43, E52

Suggested Citation

Wei, Shang-Jin, Managing Financial Globalization: A Guide for Developing Countries Based on the Recent Literature (January 31, 2018). ADBI Working Paper 804; Columbia Business School Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3140101 or http://dx.doi.org/10.2139/ssrn.3140101

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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