Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization

WIF Institute of Economic Research Working Paper No. 06/46

CESifo Working Paper Series No. 1691

26 Pages Posted: 24 Feb 2006

See all articles by Moritz Schularick

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2006

Abstract

Does international financial integration boost economic growth? The question has been discussed controversially for a long time, and a large number of studies has been devoted to its empirical investigation. As of yet, robust evidence for a positive impact of capital market integration on economic growth is lacking, as documented by Edison et al. (2002). However, there is substantial narrative evidence from economic history that highlights the contribution European capital made to economic growth of peripheral economies during the so-called first age of financial globalization before 1914. For this paper, we have compiled the first comprehensive data set to test econometrically if capital market integration had a positive impact on economic growth before WW1. Using the same models and techniques as contemporary studies, we show that there was indeed a significant and robust growth effect of international financial integration in the first era of financial globalization. Our temptative explanation for this marked difference between now and then stresses property rights protection as a prerequisite for the standard neoclassical model to work properly.

Keywords: International financial integration, Economic growth, First era of globalization

JEL Classification: F15, F21, F30, N10, N20, O11, O16

Suggested Citation

Schularick, Moritz and Steger, Thomas Michael, Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization (January 2006). WIF Institute of Economic Research Working Paper No. 06/46, CESifo Working Paper Series No. 1691, Available at SSRN: https://ssrn.com/abstract=884434

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics ( email )

Grimmaische Str. 12
D-04109 Leipzig
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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