Financial market integration: A complex and controversial journey

Abstract

In this article, we develop a comprehensive review of the literature on financial integration (FI). More specifically, we focus on all those empirical and theoretical works aimed at, first, measuring FI levels overtime, and then examining the effects of rising FI on growth, macroeconomic stability, and risk sharing. Our literature review indicates the presence of clear-cut and unanimous empirical evidence that FI increased over the last 50 (30) years in advanced economies (emerging economies). Unfortunately, there are no equally clear-cut evidence on the implications of rising FI for economic growth, macroeconomic stability and risk sharing. Puzzlingly, and inconsistently with theoretical predictions, an extensive empirical literature finds weak, inconclusive and controversial evidence that rising FI levels have stimulated growth and risk-sharing. Our journey throughout the literature on FI indicates that the reason for the existence of such controversial and inconclusive empirical findings on the FI-growth and FI-risk sharing links is that the use of different FI measures, econometric techniques, and definitions of FI make it difficult to synthesize results and draw robust conclusions.