Financial Openness Research Articles

The Impact of Financial Integration on the Labor Share of Income: An Empirical Evidence from a Panel Dataset

This paper contributes to the literature on the impact of financial liberalization by including the earnings of self-employed while investigating the core determinants and mechanisms driving the income share going to labor during financial integration. The question of the precise impact of liberalization on the share of the self-employed has received less attention in the literature. The author also uses both measures of capital account openness: de jure and de facto indicators. The empirical work is applied for a panel dataset of 30 countries during the period of 1970–2013. Despite using different measurement methods of financial openness, the results from all specifications support the hypothesis that financial integration leads to a decline in the labor share of income for the all countries sample.

An Empirical Study on the Impact of Coastal Areas on China's Financial Stability

Wang, L. and Jiang, J.J., 2020. An empirical study on the impact of coastal areas on China's financial stability. In: Qiu, Y.; Zhu, H., and Fang, X. (eds.), Current Advancements in Marine and Coastal Research for Technological and Sociological Applications. Journal of Coastal Research, Special Issue No. 107, pp. 393-397. Coconut Creek (Florida), ISSN 0749-0208.With the improvement of China's openness, the free flow of international capital is more and more free, but at the same time, it also puts forward higher requirements for the stability of the financial system. Coastal areas have the highest degree of openness in China, with more developed economy and finance. It can be said that coastal areas are “systemically important” areas that determine the degree of financial stability in China. This paper first puts forward the hypothesis of “systematic importance” of coastal areas to China's financial stability, then constructs the model of “interest rate total amount of credit”, and studies the influence degree of interest rate changes on the total amount of credit in China's major provinces by using the method of time series analysis, and then draws the conclusion that coastal areas are the “systemically important” areas of China's financial stability. Finally, this paper points out that coastal areas are the “systemically important” areas of China's financial stability Suggestions: first, coastal areas should establish corresponding financial stability assessment system while improving financial openness; second, build an effective risk early warning system; third, build an effective risk supervision system; fourth, build an effective emergency system.

Monetary policy news in the US: Effects on emerging market capital flows

We examine the impact of US monetary policy news on portfolio flows to emerging markets using a Bayesian Vectorautoregression that accounts for expectations of future monetary policy. We define the US “monetary policy news shock” as one that increases monetary policy expectations while leaving the policy rate unchanged. Results suggest that the impact of this shock on portfolio flows as a share of GDP is economically small on aggregate but varies considerably across countries. The countries we identify as being the most affected also experienced larger volumes of capital in- and outflows before and after the 2013 taper tantrum episode, respectively. Also, macroeconomic performance and external vulnerabilities may matter. However, financial openness does not seem to be associated with differences in effects on capital flows over our sample period.

Modelling opportunity cost effects in money demand due to openness

AbstractWe apply a novel model‐based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that (a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, (b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, (c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and (d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.

The influence of financial openness, trade openness, and energy intensity on ecological footprint: revisiting the environmental Kuznets curve hypothesis for BRICS countries.

This study aims to examine the impact of economic growth, financial openness, trade openness, and energy intensity on the ecological footprint of BRICS countries for the period 1996-2016 in the framework of the environmental Kuznets curve (EKC). In the research phases, the effects of financial openness and trade openness on ecological footprint were examined both individually and as a whole using three models. The results indicate that the EKC hypothesis is not valid in all BRICS countries. Specifically, the individual results demonstrate that the EKC model using financial openness is valid only for India, while the EKC model using trade openness is valid both for India and South Africa. Furthermore, financial openness has reduced environmental pollution in India and South Africa. Trade openness has reduced environmental pollution in China and India, while it has increased in South Africa. Lastly, energy intensity has increased environmental pollution in all countries except Russia for both models. Overall, policy-makers should develop policies to reduce energy intensity in BRICS countries.

The international effects of global financial uncertainty shocks

In this paper, we study the impact of sudden rises in global financial uncertainty on small open economies. To this end, we extract a global factor from the realised volatilities of about 1000 risky asset returns from around the world. We then analyse how shocks to this factor affect economic activity in 44 advanced and emerging small open economies by estimating local projections in a panel regression framework. We find that shocks increasing global financial uncertainty have adverse consequences on output, trade and unemployment, while their impact on nominal variables is more heterogeneous across countries. Furthermore, the effects are more severe in countries with a higher degree of trade or financial openness, higher levels of vulnerabilities, weaker institutions or during economic downturns.

Information asymmetry and the effect of financial openness on firm growth and wage in emerging markets

We examine whether the effect of financial openness on firm growth and wages depends on information asymmetry faced by foreign investors. We conduct a firm-year level panel regression analysis using 25 emerging market country panels for 1990–2011. We find that financial openness favors firms with lower information asymmetry (larger firms, cross-listed firms, export intensive firms), which grow faster than firms with higher information asymmetry. Further, financial openness leads to a widened wage difference between large and small firms. Finally, the asymmetric growth of large firms relative to small firms disappears as the information environment of the host country improves.

Does Oil Price and Trade Openness Nexus along with Foreign Direct Investment have Influence on Economic Growth in Thailand

The objective of this research is to analyze the conceivable cointegration and direction of causality among the oil price, trade openness, foreign direct investment and the growth rate in Thailand, using the time series data from 1974 to 2018. In addition to these variables’ fiscal development and inflation are also employed to observe the influence of financial openness on economic growth. Johansen cointegration test is utilized to detect long-run relationship incorporated with the vector error correction for the short-term association. Further, granger causality is utilized to determine the direction of causality among the contending variables. The outcomes of Johansen and vector error confirms the short and long-term affiliation among variables in Thailand. The coefficient of VECM (Wald test) detect the cumulative influence on the growth rate. The estimations of granger causality affirmed that oil price, inflation, fiscal development via trade, granger cause the growth rate and the fiscal development and foreign direct investment granger causes the growth rate in bi-direction and uni-direction, respectively. The study suggests, based on the impulse response function (under the consideration of the behavior of variables) government should liberalize trade openness as it fortifies the position of Thailand in the neighbored.

The interaction of financial openness and economic growth

The interaction of financial openness and economic growth

In search of currency internationalisation: a perspective from financial openness

This paper examines the role of financial openness for currency internationalisation. We provide a theoretical synthesis on the economic and financial channels that financial openness might affect currency internationalisation. Historical experiences from the UK, the US, Japan and Germany show the essential role played by financial policies to promote one currency’s international status. We collect recent data of a panel of countries to provide an in-depth empirical analysis on how financial openness would affect a currency’s acceptance in international official reserves. We find strong evidence that portfolio positions generally have a larger impact on the currency’s share in international reserves than FDI. Moreover, portfolio positions in the liability side, especially foreign investments in domestic debt securities, have a statistically significant and economically important effect on currency internationalisation. Our results have implications for China, highlighting the specific effects of financial policies on RMB internationalisation.

Comments on Financial Integration in Asia: A Systemic View on Currency Markets

June 01 2020 Comments on Financial Integration in Asia: A Systemic View on Currency Markets Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2020 by the Asian Economic Panel and the Massachusetts Institute of Technology2020Asian Economic Panel and the Massachusetts Institute of Technology Asian Economic Papers (2020) 19 (2): 62–64. https://doi.org/10.1162/asep_a_00756 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments on Financial Integration in Asia: A Systemic View on Currency Markets. Asian Economic Papers 2020; 19 (2): 62–64. doi: https://doi.org/10.1162/asep_a_00756 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Tao Liu, Central University of Finance and Economics: This paper evaluates the degree of financial integration in Asia, from the perspective of currency markets. This topic is important for both academic research and policy analysis. There has been a long-standing debate on the cost and benefit of financial opening and capital account liberalization. Counter-cyclical financial flows help a country smooth consumption and improve the social welfare. Cyclical financial flows, however, would increase the volatility of output and consumption, making it more difficult for central banks to manage the economy. It is therefore important to first examine the status quo of financial market integration before governments make decisions on capital account liberalization. This issue has particular urgency and importance for ASEAN countries, given the catastrophic Asian financial crisis in 1997. The authors rely on the variance decomposition in Diebold and Yilmaz (2014), as well as the pairwise Granger causality... You do not currently have access to this content.

Political credit cycles

AbstractThis paper tests the existence of political credit cycles, the positive comovement between credit and elections. While several single‐country studies point to the existence of this relationship, the link between electoral cycles and credit expansion has seen little exploration at the multicountry level. Using a comprehensive dataset covering bank and non‐bank credit in 165 countries from 1960 to 2013, we show that both government and private credit significantly increase in election years. This finding suggests the possibility that politicians use not only fiscal and monetary policy to court voters, but also implement credit policies such as interest rate subsidies and tax breaks for debt to enhance credit growth. We also find that a higher degree of financial openness weakens the frequency and magnitude of political credit cycles; yet, the conditional effect of financial openness is stronger for developing countries than developed economies.

Do Finance and Trade Foster Economic Growth in the New EU Member States: Granger Panel Bootstrap Causality Approach

ABSTRACT The aim of this paper is to investigate whether financial development and trade openness enhance economic growth in 11 new EU member states. While the overwhelming studies employ a simple measure of finance (credit to GDP ratio or stock market capitalization), we run growth regressions using a new IMF broad-based measure, which covers three dimensions of financial development: depth, access, and efficiency. We use a bootstrap panel-data approach based on seemingly unrelated regression (SUR) systems, which takes into account cross-sectional dependency and slope heterogeneity among countries. Such an approach gives separate regression coefficients for each country. The main findings are as follows: (1) the statistically significant unidirectional Granger causality from finance to economic growth is evidenced in five countries under examination (Bulgaria, Lithuania, Poland, Romania, and Slovenia); (2) trade openness is statistically significant Granger-cause of growth in six new EU member states (Croatia, Latvia, Lithuania, Romania, Slovakia, and Slovenia); (3) the reverse causalities, i.e. running from growth to finance were found in two countries (Hungary and Slovenia), and from growth to trade openness in Croatia. The policy-oriented recommendation is that new EU member states from Central and Eastern Europe may gain pro-growth benefits from further finance and trade development, however, the policy-makers should be aware of possible nonlinearities and conditionality of these relationships.

Financial Liberalization and Current Account Developments in New EU Member States

Abstract Due to negotiations on accession to the EU, the new EU member states from Central and Eastern Europe went through the financial opening. In the pre-crisis period followed by high liquidity in global markets, most of the EU new member states experienced rapid credit growth, which conditioned the appreciation of the exchange rate. External imbalances and vulnerabilities built up. Countries experienced deterioration in their current accounts. This paper investigates the link between financial openness, real effective exchange rate, financial crisis and current account balance within the Panel Auto-Regressive Distributed Lag (ARDL) framework for 11 new European Union members during the period from 1999 to 2016. The results obtained by the use of pooled mean group estimator (PMG) show that in the long run, financial openness has a significant negative impact on the current account balance. In the short run, crisis significantly influences the current account balance having a positive sign.

The International Spillover Effects of US Monetary Policy Uncertainty

An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis.

Classifying de facto exchange rate regimes of financially open and closed economies: A statistical approach

ABSTRACT This paper offers a new de facto exchange rate regime classification that draws on the strengths of three popular classifications. Its two hallmarks are the careful treatment of a nexus between an exchange rate regime and financial openness and the use of formal statistical tools (the trimmed k-means and k-nearest neighbour methods). It is demonstrated that our strategy minimises the impact of differences between market-determined and official exchange rates on the ‘fix’ and ‘float’ categories. Moreover, it is more suited to assess empirical relevance of the Mundellian trilemma and ‘irreconcilable duo’ hypotheses. Using comparative analysis we find that the degree of agreement between classifications is moderate: the null of no association is strongly rejected, but its strength ranges from low to moderate. Moreover, it is shown that our classification is the most strongly associated with each of the other classifications and as such can be considered (closest to) a centre of a space of alternative classifications. Finally, we demonstrate that unlike other classifications, ours lends more support to the Mundellian trilemma than to the ‘irreconcilable duo’ hypothesis. Overall, our classification cannot be considered a variant of any other de facto classification. It is a genuinely new classification. Highlights We develop a statistically-based de facto exchange rate regime classification The trimmed k-means and k-nearest neighbour methods are used Fix and float categories are identified with the correction for financial openness The new classification is a centre of a space of alternative classifications Our classification supports the trilemma rather than irreconcilable duo hypothesis

Взаємозв’язок фінансової відкритості та економічного зростання

The article summarizes current approaches to the theoretical substantiation of the effects of financial openness on emerging economies. The empirical data on the verifying financial openness effects, in particular the promotion of capital inflows into emerging economies and their productive development in the context of globalization processes, are analyzed. An attempt has been made to identify the influence of the interest rate factor on the direction of the redistribution of international capital flows. Generalized the patterns of the distribution of capital movement instruments depending on the level of development of financial institutions and signs of the capital flows' strong deformation impact on financial markets with underdeveloped institutional environment. As a result of the analysis, it was found that under the conditions of the new normality, characterized by an increase in the volume of free movement of volatile capital flows, an increase in the level of financial openness, contrary to theoretical provisions, does not directly cause the inflow of foreign capital. At the same time, attracting foreign capital on a free, unregulated basis has a limited impact on economic development and mainly finances only the existing, well-functioning, high-yield markets and industries. Contemporary realities and the approach to the evaluation of foreign direct investment as the most effective and less volatile instruments of attracting foreign capital do not correspond to the current state of things. In today's context, only a small part of the FDI arrive into the real sector, while the bulk of them are localized in high-yield segments of the financial markets and used for tax evasion. The lack of direct dependence of international capital flows on the spread of capital yields and the level of financial openness leads to the conclusion that, in addition to the classical factors, the drivers of foreign capital inflow include positive economic dynamics of the recipient country and presence of high-yield markets. At the same time, signs of sustainable economic growth or recession by themselves encourage capital inflow or outflow from the country. At the same time, the presence of a developed financial sector reduces the risks of instability and increases the investment component of financial openness. These conditions form an inverse relationship between macroeconomic dynamics, the level of development of the institutional environment and the change in the level of real financial openness of the economy.

International Financial Crisis: Expectation Transmission and Policy Synchronisation

In recent years, the economic and financial linkages of major economies have become intertwined, and the cross-market contagion effect of the global financial crisis has become more apparent. This paper mainly studies the expectation transmission and policy synchronisation in international financial crisis, netting out influence of fundamental-based factors. Contributions of this paper are two folds. First, we innovatively calculate and utilize expectation gap and policy gap. We apply Taylor Rule regression to different expectation and monetary policy stance variables, and uses respective residuals as expectation gap and policy gap. We measure expectation transmission and policy synchronisation by correlation of expectation gap/policy gap between originating economy and affected economies. Second, we innovatively propose financial accelerator in open economy and Taylor Rule augmented by international factors as respective theoretical basis of expectation transmission and policy synchronisation. Our empirical study covers four international financial crises and 24 economies, and finds that expectation transmission and policy synchronisation are generally significant in the four crises. Transmission efficiency varies because of financial openness, financial stability and regional integration. Economic weight of the originating economy also exerts influences. These results convincingly support the theoretical analysis in this paper. Based on above results, this paper proposes relevant policy recommendations, such as to strengthen expectation management, to strike balance between domestic and international equilibrium, and to strengthen international macroeconomic policy coordination.

Geopolitical Risk and Energy Transition in Russia: Evidence from ARDL Bounds Testing Method

One of the current debatable global problems is climate change or global warming as crucial geopolitical risks. The progress of energy transition by considering geopolitical risk has not been considered seriously yet. This paper contributes to the literature by modeling and analyzing energy transition patterns in Russia with emphasis on geopolitical risks factor as a giant fossil fuels producer using the ARDL bounds testing method over the period of 1993–2018. The main results proved long-run negative impact of economic growth, population growth and inflation rate on energy transition of Russia, while CO2 emissions, geopolitical risk, exchange rate and financial openness have positive impacts on energy transition movement in the country. Furthermore, we found out that in the short-run, the relationship between energy transition improvement and economic growth, CO2 emissions, population growth and inflation rate is negative, while geopolitical risk, exchange rate and financial openness are the only variables which accelerate energy transition in the country. As major concluding remarks, Russia’s policy makers should draw attention to the long-run energy plans in the country. Furthermore, lowering dependency of Federals’ budget to the oil and gas revenues would be a useful policy to reduce negative impact of economic growth on energy transition movement in the country. Another recommendation is to determine rapid decarbonizing policies in the country.

Financial integration and total factor productivity: in consideration of different capital controls and foreign direct investment

There is a long debate among policymakers and academicians regarding whether assessments of international financial integration have significant growth benefits and whether such benefits compensate for the accompanied risks. Recent financial crisis has revived this debate. The previous empirical studies have not been able to establish conclusive presumed benefits of financial integration for economic growth. This paper attempts to analyze the financial openness and total factor productivity (TFP) growth nexususing dynamic panel regression models for a substantial sample of countries ranging from year 1970 to 2014. Different measures of financial openness are incorporated in the dataset. We find evidence that financial integration is associated with higher TFP growth. A range of integration measures (both de jure and de facto) shows robust association with financial integration and TFP growth. The result also suggests that financial development might reduce the marginal effects of financial integration on TFP growth. This finding, however, appears to be influenced by the recent global economic turmoil and excessive private finance, especially in recent years.