Degree Of International Financial Integration Research Articles

International financial integration and economic growth in developing and emerging economies: an empirical investigation

This paper explores the relationship between international financial integration (IFI), external vulnerability and economic growth. It proposes a taxonomy of typical IFI profiles and applies it to a sample of 90 developing and emerging economies (DEEs) for the 1992–2016 period using a dynamic panel data model. Drawing from a Post Keynesian and Structuralist analytical framework, it argues that what matters for economic growth is less the degree of IFI per se and more the profile, or “quality,” of this integration. The results suggest that DEEs which succeed in integrating into global financial markets under a more balanced and autonomous profile may experience, at best, negligible benefits for economic growth, while a more financially dependent and vulnerable profile exacerbates the risks of financial globalization, undermining growth in the long run. Moreover, the growth path in the latter tends to be more affected by external financial shocks, even though systemic shocks also impact the former.

Financial integration and the comparative advantage of exports

We use a cross-country cross-industry unbalanced panel dataset to examine whether countries with a higher degree of international financial integration exhibit a greater comparative advantage in the exports of industries that rely more on external financing. Our results indicate that financial integration can be a source of comparative advantage, especially for industries relying more on external finance. However, the benefits of financial integration also depend on a country’s quality of economic and legal institutions. The pros and cons of international financial integration are still being debated in the literature. Our study adds empirical evidence to the beneficial effects of financial integration on real economic activity.

Are Determinants of International Financial Integration in the European Transition Countries Different from Post-Transition Countries?

The paper seeks to empirically explore the variations and changes in the degree of International Financial Integration (IFI) between the European Transition countries and Post-Transition countries between 2000 and 2016. The estimation of parameters was made using the Generalized Method of Moment (GMM) approach. The findings of the study reveal that European Post-Transition countries have relatively more developed financial systems compared to European Transition countries, where private credit market is still playing an overwhelmingly important role in a financial system while stock markets are in an early stage of development constituting a relatively small share of the financial system. Even though in Panel 3 there are significant control variables, our findings reveal that IFI in European transition countries are affected neither by stock market capitalization and private credit markets. Consequently, they can't be used in this stage of financial development for explanation of variations and changes in the degree of IFI.

Are Determinants of International Financial Integration in the European Transition Countries Different from Post-Transition Countries?

Abstract The paper seeks to empirically explore the variations and changes in the degree of International Financial Integration (IFI) between the European Transition countries and Post-Transition countries between 2000 and 2016. The estimation of parameters was made using the Generalized Method of Moment (GMM) approach. The findings of the study reveal that European Post-Transition countries have relatively more developed financial systems compared to European Transition countries, where private credit market is still playing an overwhelmingly important role in a financial system while stock markets are in an early stage of development constituting a relatively small share of the financial system. Even though in Panel 3 there are significant control variables, our findings reveal that IFI in European transition countries are affected neither by stock market capitalization and private credit markets. Consequently, they can’t be used in this stage of financial development for explanation of variations and changes in the degree of IFI.

A Welfare‐Based Analysis of International Monetary Policy Spillovers at the Zero Lower Bound

AbstractWe study the welfare effects of international monetary policy spillovers at the zero lower bound, focusing on the effects of forward guidance in a large economy (“foreign”) on its smaller trading partner (“home”) in scenarios motivated by the global financial crisis. We find that foreign forward guidance has an overall prosper‐thy‐neighbor effect on the home economy as long as it increases foreign welfare. This finding holds under alternative assumptions about exchange rate pass‐through or the degree of international financial integration. However, foreign forward guidance may worsen the trade‐off between the stabilization objectives of home monetary policy.

Financial integration and macroeconomic volatility: evidence from Asia

Purpose The purpose of this paper is to empirically examine the impact of financial integration on macroeconomic volatility for developing and emerging economies of Asia. Design/methodology/approach The effects of financial integration and dynamics of macroeconomic volatility over time and across different groups of Asian economies vis-à-vis advanced economies are investigated using four different variables such as consumption, output, income and the ratio of consumption to income. Further, an empirical link between the degree of international financial integration and macroeconomic volatility for Asian economies is econometrically investigated using generalized method of moments (GMM) system one-step estimator. Findings Macroeconomic volatilities of per capita output and consumption growth tend to be lower for advanced economies compared to Asian economies. The computed cross-sectional median of the volatility of consumption, output, income and the ratio of consumption volatility to income suggested that the volatility of advanced economies is lower compared to all the regions of Asia. GMM results suggested that the financial openness, trade openness and broad money are negatively and significantly associated with macroeconomic volatility whereas inflation is positively and significantly associated with macroeconomic volatility but the magnitude of trade openness is found to be negligible. Research limitations/implications The present study has not included the effects of other country-specific variables (such as fiscal policy volatility) and other external factors to understand macroeconomic volatility. Practical implications High integration of economies promote economic growth, reduce macroeconomic volatility and reduce vulnerability to external shocks. This implies that policy makers should thrive to reform and create institutional infrastructure to deepen the integration. Originality/value The paper is an important empirical contribution toward examining the effects of financial integration on dynamics of macroeconomic volatility for a large number of Asian developing and emerging economics over time and across different groups using recent data and latest analytical framework and techniques.

Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies

This paper explores the direct effects and spillovers of unconventional monetary and exchange rate policies. We find that official purchases of foreign assets have a large positive effect on a country’s current account that diminishes considerably as capital mobility rises. There is an important additional effect through the lagged stock of official assets. Official purchases of domestic assets, or quantitative easing (QE), appear to have no significant effect on a country’s current account when capital mobility is high, but there is a modest positive impact when capital mobility is low. The effects of purchases of foreign assets spill over to other countries in proportion to their degree of international financial integration. We also find that increases in US bond yields are associated with increases in foreign bond yields and in stock prices, as well as with depreciations of foreign currencies, but that all of these effects are smaller on days of US unconventional monetary policy announcements. We develop a theoretical model that is broadly consistent with our empirical results and that highlights the potential usefulness of domestic unconventional policies as responses to the effects of foreign policies of a similar type.

Does International Financial Integration Spur Economic Growth? Evidence from Pakistan

The degree of international financial integration has seen a drastic change recently, especially during the last two decades. This study attempts to explore the relationship between international financial integration and economic growth in the context of Pakistan through a sample of data from 1975 to 2013 using time series analysis. International financial integration is used as an index that comprises foreign direct investment, remittances, and external debts. The results indicate that international financial integration has a significant and negative effect on economic growth. Cointegration results have found a significant and long run relationship, whereas variance decomposition method shows bidirectional causal relationship. The sensitivity analysis proves that the initial result is robust through fully modified ordinary least square method, while Cusum and Cusum of square proves stability of coefficients over a long period.

Unconventional Monetary and Exchange Rate Policies

This paper explores the direct effects and spillovers of unconventional monetary and exchange rate policies. We find that official purchases of foreign assets have a large positive effect on a country's current account that diminishes considerably as capital mobility rises. There is an important additional effect through the lagged stock of official assets. Official purchases of domestic assets, or quantitative easing (QE), appear to have no significant effect on a country's current account when capital mobility is high, but there is a modest positive impact when capital mobility is low. The effects of purchases of foreign assets spill over to other countries in proportion to their degree of international financial integration. We also find that increases in US bond yields are associated with increases in foreign bond yields and in stock prices, as well as with depreciations of foreign currencies, but that all of these effects are smaller on days of US unconventional monetary policy announcements. We develop a theoretical model that is broadly consistent with our empirical results and that highlights the potential usefulness of domestic unconventional policies as responses to the effects of foreign policies of a similar type.

The Determinants of International Financial Integration in the MENA Area

Abstract The degree of International financial integration has considerably increased over the last two decades and has become a topical area of research. This study aims to offer some insight into understanding this phenomen in the MENA area. Several explanations are considered and discussed such as trade openness, the level of development, the financial market development, the inflation rate, fluctuations in the exchange rate, the financial crisis of 2008 and the tax policy. Overall, the results provide strong evidence in support of our choice of drivers of international financial integration.

What Can International Finance Add to International Strategy?

This chapter focuses on the role of corporate financial strategies to improve firms’ market valuations, and thus lower their cost of capital. The identification of successful strategies is accomplished within an overall strategic framework and related to how the firm perceives the degree of international financial integration. Five strategies for how to break out of a segmented, thin domestic capital market are highlighted together with historical success cases. The chapter illustrates the linkages between business strategy, firm motivation, and various financial strategies.

The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality

Over the last two decades, the degree of international financial integration has increased substantially, becoming an important area of research for many financial economists. This paper explores the determinants of the asymmetries in the international integration of banking systems. We consider an approach based on both network analysis and the concept of geographic neutrality. Our analysis focuses on the banking systems of 18 advanced economies from 1999 to 2005. Results indicate that banking integration should be assessed from the perspective of both inflows and outflows, given that they show different patterns for different countries. The parametric techniques point out the remarkable role of both geographic distance and trade integration. However, the most relevant results are yielded by nonparametric techniques, which we use due to the lack of well-established results on the determinants of trade in assets. These techniques reveal that the effect of the covariates on banking integration is not constant over the conditional distribution which (in practical terms) implies that the sign of the relationship varies across countries.

Oil shocks and external balances

We provide estimates of the effects of demand and supply shocks in the global crude oil market on several measures of oil exporters' and oil importers' external balances, including the oil trade balance, the non-oil trade balance, the current account, capital gains, and changes in net foreign assets (NFA). First, we show that the effect of oil demand and supply shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the non-oil trade balance. Our results provide evidence of an intermediate degree of international financial integration. Second, we document the presence of large and systematic valuation effects in response to these shocks. Valuation effects overall tend to cushion the effect of oil demand and supply shocks on the NFA positions of oil exporters and oil importers. Third, we quantify the overall importance of global business cycle demand shocks as well as oil-market specific demand and supply shocks for external balances.

International financial integration through the law of one price: The role of liquidity and capital controls

This paper takes advantage of the fact that some stocks trade both in domestic and international markets to characterize the degree of international financial integration. The paper argues that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration and the effectiveness of capital controls. Using Autoregressive (AR) models to estimate convergence speeds and non-linear Threshold Autoregressive (TAR) models to identify non-arbitrage bands, the paper shows that price deviations across markets are rapidly arbitraged away and bands are narrow, particularly so for liquid stocks. The paper also shows that regulations on cross-border capital flows effectively segment domestic markets. As expected, the effects of both types of capital controls are asymmetric but in the opposite direction: controls on outflows induce positive premia, while controls on inflows generate negative premia. Both vary with the intensity of capital controls.

Financial development and growth: An empirical analysis

Over the last two decades several countries experienced currency crises. These were characterized both by a huge disruption of economic activity and an extreme speed of diffusion within countries. The financial turmoil happened in a period of very high degree of international financial integration. As a result financial liberalization was associated with greater incidence of crises and this brought an intense debate in both academic and policy circles about the consequences of free capital movements. In this paper we aim to check the existence and the strength of credit channel and balance sheet effects in countries characterized by an intermediate level of financial development. A huge literature exists about the topic concerning the role that credit market and financial development play on the real activity. The paper empirically examines the dynamic relationship between financial development and economic growth. A time-series approach using the VAR Model has been used to provide an assessment of empirical evidence on the effects of financial development on macroeconomic volatility.

International financial integration in Asian bond markets

With the development of international financial market, the degree of international financial integration increased significantly during the late 1980s and 1990s. A key factor underlying this process was the increased globalization of investments seeking a higher rate of return and the opportunity to diversify risk internationally. In this paper, we investigate the degree of international financial integration in Asia by examining the relationships amongst Asian bond markets by employing the advanced econometric technique of cointegration of error correction vectors. In other words, we propose the answers to the following questions. Firstly, what is the degree of international financial integration in Asian bond markets? Secondly, does this degree of integration significantly change after the 1997 Asian financial crisis? This study has a strong implication for investors, in particular, from the perspective of Australian or US investors, whether they do benefit from investing in Asian bond markets. In addition, understanding the extent of financial integration and monitoring its progress in the region is important for Asian central banks. In addition, increased international financial integration promotes financial development and hence enhances economic performance in the region.

The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality

Over the last two decades, the degree of international financial integration has increased substantially, becoming an important area of research for many financial economists. This working paper explores the determinants of the asymmetries in the international integration of banking systems. We consider an approach based on both network analysis and the concept of geographic neutrality. Our analysis focuses on the banking systems of 18 advanced economies between 1999 and 2005. Results indicate that banking integration should be assessed from the perspective of both inflows and outflows, given that they show different patterns for different countries. Using standard techniques, our results reinforce previous findings by the literature-especially the remarkable role of both geographic distance and trade integration. Nonparametric techniques reveal that the effect of the covariates on banking integration is not constant over the conditional distribution, which (in practical terms) implies that the sign of the relationship varies across countries.

Capital controls, capital flow contractions, and macroeconomic vulnerability

In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970–2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability.

Opening China's Capital Account: Modeling the Capital Flow Response

Capital account convertibility in China is on the rise. In this paper we consider the impact that removing remaining capital controls might have on the volume of China's international capital flows. Better understanding of this capital flow response can shed light on China's current degree of international financial integration, which has important implications for policy decisions such as whether China should move toward a more flexible exchange rate regime. It is also relevant to discussing the financial stability consequences of removing remaining capital controls. The main finding is that China's capital account is already quite open, thus implying a tradeoff presently exists between exchange rate stability on the one hand and monetary independence on the other. In terms of financial stability, the results generally serve to allay fears that further opening the capital account would compromise China's international payments ability or disrupt global capital flows.

The determinants of international financial integration

It is generally accepted that there has been an increase in the degree of international financial integration over the last two decades. As a result, international financial integration has become a topical area of research for many financial economists. To enrich the literature in this area, our paper provides an empirical investigation into identifying the potential “drivers” of international financial integration including policy on capital controls, the level of economic and educational development, economic growth, institutional and legal environment, trade openness, financial development and tax policy. Overall, the results provide strong evidence in support of our choice of drivers of international financial integration.