How Does International Financial Integration Really Affect Post-Transition Countries' Growth? Empirical evidence from the CEE-10 countries

Mehmed Ganić,Mahir Hrnjić

doi:10.2478/jcbtp-2021-0027

Abstract

Abstract This paper seeks to empirically explore how an international financial integration influences a country’s GDP growth. The long run relationship is tested by PMG estimator for the sample of ten EU countries from Central, Eastern and Southeastern Europe (CEE-10 countries) between 1995 and 2017. Prior to the conducting of dynamic panel analysis based on PMG estimators, several panel unit root tests were conducted, as well as panel co integration tests. The findings offer mixed impact financial integration on growth. Among the measures of financial integration, growth of the CEE-10 countries is mostly driven in the long run by FDI inflows as well as remittances and financial openness. On the contrary, the study suggests a reversal relationship between growth and financial integration measured by Gross Foreign Assets and Liabilities in percentages of GDP. It might be explained with a fact that CEE-10 countries have not yet reached a certain level of financial development in order to benefit from financial integration. The study concludes that international financial integration does not per se enhance economic growth and country’s growth in the CEE-10 countries can be reached at a higher level of financial integration, further increase their financial openness and financial development.

Highlights

The nexus between financial integration and economic growth has become an important topic of many research studies
This study aims to investigate whether international financial integration boosts economic growth by employing recently developed panel cointegration techniques
One of the issues examined in this study is whether the level of financial integration in CEE-10 countries is sufficient to encourage and stimulate economic growth

Summary

Introduction

The nexus between financial integration and economic growth has become an important topic of many research studies. Different econometric approaches are employed in numerous empirical studies such as time series analysis, cross-section analysis, and panel data analysis to explore the empirical assessment of financial integration – growth nexus. The paper examines the cointegration relationship between international financial integration and economic growth in short run and long run as well as speed of adjustment, overcoming the limitations of previous scientific research. This study fills this gap in academic literature of European post-transition countries To our knowledge this approach is different than the existing literature because this is the first study to use PMG estimator to examine the existence of the long run relationship between financial integration and growth for CEE-10 countries

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Conclusion