Financial Openness Research Articles

DRIVERS OF ECONOMIC PERFORMANCE: DO INSTITUTIONAL QUALITY AND FINANCIAL LIBERALIZATION MATTER? EVIDENCE FROM SANE AND ASIAN TIGERS

The aim of this study is to examine the impact of financial liberalization and institutional quality on the economic performance of the Asian Tigers and the SANE countries. The study used annual series that spanned the period from 1996-2020 under the framework of FMOLS. Findings of the study revealed that in the Asian Tigers, FDI inflows, FDI outflows, capital account openness and governance effectiveness had a positive and significant impact on the GDP per capita, but the impact of political stability was negative and significant. Results for the SANE countries indicated that both FDI inflows and trade openness impacted positively and significantly on the GDP per capita, while the impact of capital account openness was negative and significant. Consequently, the study is of the view that while it will be necessary for the SANE countries to upgrade their institutions in order to reap the benefits of financial openness, the Asian Tigers should stabilize their polity to improve their economy.
 Keywords: Institutional quality, FDI, GDP per capita, Financial development, Trade openness, Asian Tigers.
 JEL Classification: E02, F21, F43

Financial structure and income inequality

We empirically investigate whether financial structures affect income inequality. Using panel data for 97 economies covering above two decades preceding the FinTech surge we uncover a non-monotonic relationship. More finance reduces income inequality up to a certain point, beyond which inequality rises if finance expands via market-based financing, while it does not when finance grows via bank lending. The finance-inequality relationship is not structurally affected by the occurrence of crises, while it is reinforced in countries featuring a higher degree of financial openness. Financial deepening always reduces inequality when it takes the form of improved financial access.

Financial openness and profitability premium: Causal evidence from the Shanghai‐Hong Kong Stock Connect

AbstractThis study explores the impact of capital market openness on the profitability premium by using the Shanghai‐Hong Kong Stock Connect (SHKSC) programme as an exogenous shock. The empirical results show that (1) we can basically rule out the mispricing mechanism driving the significant profitability premium in China; (2) following SHKSC, the expected stock returns increase more across less profitable firms, and the less profitable firms have more increases in illiquidity, capital structure and information disclosure quality; and (3) the results are still robust after using propensity score matching analysis, deleting the highly volatile periods and conducting a firm‐level test with the triple‐differencing design.

Global financial cycles since 1880

We analyse global aggregate and segment-specific cycles across credit, house prices, equity prices, and interest rates in 17 economies over 130 years using a time-varying dynamic factor model. We show that global financial cycles have gained relevance over time. For equity prices, they now constitute the main driver of fluctuations in most countries. Global cycles in credit and housing have become more pronounced and protracted since the 1980s, and their relevance has increased for a sub-group of financially open and developed economies. Panel regressions show that a country’s susceptibility to global financial cycles tends to increase with financial openness and financial integration, the extent of mortgage-related lending, and the efficiency of stock markets. Understanding changes in global co-movement over time and its heterogeneous role across countries matters for the design of financial stabilization policies.

Relationship of Trade Openness, Financial Openness, and Unemployment Rate in ASEAN

This study discusses the role of economic globalization in reducing unemployment in ASEAN. The purpose of this study is to test and analyze the effect of economic globalization on unemployment in ASEAN. The method used is GMM with the period 1996-2021. Estimation results indicate that economic growth and inflation have a significant negative effect on the unemployment rate in ASEAN, while economic globalization and trade openness have a significant positive effect on unemployment in ASEAN, but financial risk does not have a significant effect on unemployment in ASEAN. Keyword: GMM, Unemployment, Economic Growth, Inflation, Economic Globalization, Trade Openness, Financial Openness

Financial opening, financial development and industrial restructuring: a mediating effect analysis

PurposeThe purpose of this study is to probe into the influence mechanism of financial opening onto industrial restructuring from the prism of financial development and examine the role of the credit market, capital market and currency market in transmitting the impact of financial opening onto industrial restructuring in both developed countries and developing countries.Design/methodology/approachIn the theoretical model, the indicator of financial opening was introduced in Cobb–Douglas production function formula. Using constant elasticity of substitution utility function, based on Engel’s law, the optimal industrial structure in the economy was concluded. For the empirical analysis, data was collected from 36 developed countries and 34 developing countries during the period 2000 to 2019. Multiple mediator models with bootstrap techniques were used to identify the linkage between financial opening, financial development and industrial restructuring.FindingsFirst, there is a U-shaped relationship between financial opening and industrial restructuring. Second, financial development plays a mediating role in transmitting the effects of financial opening onto industrial restructuring mainly through the credit market at the global level. Third, developed countries are in a trend of “reindustrialization,” while developing countries show a trend of “premature deindustrialization.” Moreover, for developed countries, the capital market leads to reindustrialization, while the credit market and currency market contribute to deindustrialization. For developing countries, the capital market and credit market lead to deindustrialization, while the currency market contributes to industrialization.Originality/valueUnlike most previous researches, this paper focuses on examining three-variable relationship between financial opening, financial development and domestic industrial restructuring. Against the backdrop of the pandemic, monetary policy shifts of developed economies have led to an increase in cross-border capital flows, which will lead to the increasing risks for international financial markets and the reallocation of the global value chain. It is of great significance to clarify the linkage between these three variables in the face of a volatile international financial environment.

Financial openness and financial market development

In this paper, we empirically study the linkages between financial openness and financial development using a sample of 164 countries during 1960–2020. Based on the results of the estimation of systems of equations, we find that the relationship between relative financial openness and relative banking sector development is positive and bidirectional. Likewise, the relationship between relative financial openness and relative stock market development is positive and bidirectional. However, the relationship between relative financial openness and relative bond market development is negative and bidirectional.

Capital requirements and growth in an open economy

This paper studies the effects of capital requirements, both independently and jointly with the degrees of financial development and financial openness, on economic growth. The first part illustrates how these effects operate in a simple two-period endogenous growth model with banking. The second part provides an empirical analysis based on panel data regressions for a sample of 107 advanced and developing economies. Sensitivity analysis, including with respect to potential causality and endogeneity issues, is also provided. The results show, in particular, that capital requirements can promote growth by mitigating the risk of financial crises, possibly by encouraging (in line with the skin in the game argument) prudent lending. However, financial development and financial openness tend to mitigate the growth benefits of these policies, because of increased scope for (domestic and cross-border) regulatory arbitrage and, in the case of financial openness, greater opportunities to borrow abroad.

Dynamic Effect of Exchange Rate Gap Shocks on Stock Market Deepening: Evidence from Nigeria

The study examines the exchange rate gap shock–stock market deepening nexus in Nigeria using the structural VAR-X (SVAR-X) technique for the period 1986Q1 to 2018Q4. Findings reveal that exchange rate gap shock has a negative but statistically not significant effect on stock market deepening in Nigeria. It was also found that exchange rate passed–through interest rate from second to thirteen quarter, and further through financial openness whose effect, like exchange rate gap, was negative. This implies that exchange rate gap is significantly and negatively related to interest rate and financial openness in Nigeria. It is therefore recommended that the monetary authority should keep constant tab on the gap between official and parallel market exchange rates as its widening can have a damaging effect on stock market deepening. In addition, there is need to establish hedging instrument market to increase resilience of the stock market and improve stock market deepening in Nigeria.

Financial Openness and Inflation: Recent Evidence

Financial Openness and Inflation: Recent Evidence

Quantifying the Link between Financial Development and Bank Profitability

This study seeks to examine the impact of financial development on bank profitability in Sub-Saharan Africa (SSA). We also investigate how institutional quality, bank stability, financial openness, and competition affect profitability. The researchers employ data from 33 countries covering from 2000 to 2017. Using the generalized method of moments (GMM) technique, the findings show that financial development exerts a negative significant effect on banking sector profitability. This result holds regardless of the indicator of profitability. This indicates that financial development dampens profitability in SSA. The study also reveals that institutional quality and bank stability positively and significantly influence profitability. We further observe that the impact of financial openness and competition on profitability significantly differs depending on the measure of profitability. The study discusses key implications for policy.

The green sin: how exchange rate volatility and financial openness affect green premia

The green sin: how exchange rate volatility and financial openness affect green premia

A macro analysis of gender segregation and job quality in Latin America

Latin America has seen vast improvements in gender educational and health equality. Favorable supply-side conditions, however, have not translated into greater gender economic equality, a process that also depends on structural economic change and global macroeconomic conditions. In this paper, we assess the role of a variety of macro-level policies and structures in influencing trends in women’s access to high-quality jobs for a sample of 15 countries in Latin America over the period 1990–2018. Using micro-level data, we first evaluate women’s relative share of good jobs, defined in terms of women’s weekly earnings in an industry or occupation relative to the national median wage. Further, we econometrically estimate the association between a variety of macro-level variables and the relative quality of women’s jobs. Results indicate that the most significant and robust positive correlate of women’s relative access to good jobs is public social spending as a share of GDP. Other important macro-covariates include measures of labor market regulation, monetary and fiscal policy, and macroeconomic structure and global orientation, including financial openness. The results suggest that macro-level structures and policies related to globalization that hamper the achievement of greater gender equality can be offset by appropriately targeted government policies.

The Impact of Government Effectiveness on Trade and Financial Openness: The Generalized Quantile Panel Regression Approach

Purpose: This paper aims to investigate the impact of government effectiveness on trade and financial openness in 35 selected countries around the globe. Design/methodology/approach: A quantitative research approach was applied in the study using the generalized quantile panel regression approach to analyze the impact of identified variables in these selected countries. Panel quantile models with high estimation performance are preferred in the presence of excessive deviations and in cases where the normal distribution is invalid. Findings/results: The empirical findings indicate that selected countries with above-average governmental effectiveness, that is, with a well-established state bureaucracy and a historically strong state tradition, will further increase their activities toward international integration through financial and trade openness. Practical implications: This study aims to provide valuable information that governments and regulatory authorities can benefit from in their decision-making processes. Originality/value: In this study, it is preferred to use the trade openness of countries as the share of exports in total world exports and financial openness as the ratio of capital flows to world flows. In this way, these variables will provide new information to analyze the influence of government effectiveness. Implementing the generalized quantile panel regression technique can also be expressed as an innovation in this field of literature.

Foreign direct investment under uncertainty evidence from a large panel of countries

AbstractWe examine the effect of uncertainty on foreign direct investment inflows for advanced, emerging market and developing countries over a 25‐year long (pre‐Covid) sample. Using a push‐pull framework, and controlling for both global and local factors, we find policy uncertainty has discernable and significant effects on inflows, varying in strength and direction between different groups of countries. Moreover, it is not host country uncertainty that seems to matter the most, but rather global uncertainty. Additionally, we find that high levels of uncertainty matter disproportionately. Finally, financial openness accentuates the impact of uncertainty for emerging market and developing countries.

Testing for Efficient Market Hypothesis on Malaysian’s Stock Market: Does Crisis Regime Matter?

In the context of the recent financial crisis, there has been growing questions about improving the efficiency of the stock market through liberalization. Although many researchers have studied the empirical effects of financial liberalization on stock market efficiency, consistent conclusions remain elusive. This paper aims to study the long and short-run relationship between financial liberalization and stock market efficiency before and after the global crisis strike in Malaysia. Specifically, Autoregressive Distributed Lag (ARDL) is the main econometric technique applied to explore this study. This study uses quarterly time series data over the period from 1998Q1 to 2020Q4. The findings revealed that financial openness and trade openness affect the stock market positively in the short and long term. In conclusion, these results indirectly support the efficient market hypothesis in Malaysia. Findings provide some policy implications in which the country should reinforce the prerequisites of openness to avoid the potential of initial crisis by equipping in an appropriate manner to minimize the short-term costs of liberalization to achieve long-term benefits.

Economic Globalization in Asean Countries: A Panel Cointegration Analysis

Economic globalization refers to the increasing interdependence of world economies due to the growing scale of cross-border trade of commodities and services, the flow of international capital and the vast and rapid spread of technologies. The process of economic globalization in improving the economy takes time. ASEAN consists of ten countries and each has different behaviors. The development of economic globalization and the speed in increasing economic openness for each ASEAN country is different, hence the need to analyze the relationship between time and across countries using panel data. Therefore, this study aims to analyse further the effect of economic globalization on ASEAN GDP in the short and long term. It uses ICT, economic freedom, and economic openness (trade openness and financial openness) as proxies of economic globalization. The analysis method is a panel cointegration analysis and Dumitrescu-Hurlin panel causality test. The result shows that GDP growth is significantly influenced by ICT, financial openness, and economic freedom in the long term. This study reveals that economic freedom affects GDP growth positively in the long term. Conversely, ICT and financial openness have drawbacks in the long run. Meanwhile, only ICT and trade openness significantly influence GDP growth in the short term. Finally, this study reveals that economic globalization has different impacts on the economy in the short and long term.

Currency internationalization and openness: A paradigm from renminbi

AbstractThis article intended to empirically test the interactive effects among renminbi (RMB) internationalization, trade and financial openness. Based on the monthly data from the first month of 2011 to the sixth month of 2018, we first build a vector error correction model includes RMB internationalization index, financial openness, trade openness, inflation rate, exchange rate and economic growth rate. Second, both linear and nonlinear Granger causality tests are conducted to analyze the causality of those variables. The results reveal that financial and trade openness have the greatest effects on the degree to which RMB is internationalized. In the short run, the trade openness will promote the development of RMB internationalization, while the financial openness will restrain such an effect. Long‐term conclusions are the opposite. Meanwhile, financial openness can influence RMB internationalization nonlinearly while RMB internationalization cannot influence financial openness either linearly or nonlinearly. In addition, a strong two‐way nonlinear Granger causality exists between RMB internationalization and exchange rate, and RMB internationalization and trade openness, respectively. Moreover, we find more nonlinear Granger relationships compared to linear Granger relationships, which implied that the relationships between RMB internationalization and other essential elements need to be assessed in the context of a complex nonlinear mechanism. The findings have important policy implication for RMB internationalization and provide a reference to jointly promote currency internationalization and openness.

The Impacts of Financial Crises on the Trilemma Configurations

Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness while recognizing that not all three policies can be achieved to the fullest extent – the “monetary trilemma” hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries’ policy mixes have been diverse and varied over time from the perspective of the trilemma and also IR holding. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficit (i.e., “large capital borrowers”) tend to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions.

Supply shocks and monetary policy responses in emerging economies

Supply shocks bring about important dilemmas for monetary policy in emerging economies. We compute monetary policy responses to supply shocks using quarterly data and a Bayesian panel VAR for 24 emerging economies during the period 2004–2019. In this framework, we identify supply shocks as unexpected and temporary total factor productivity innovations which are orthogonal to demand related shocks. We highlight three results from this econometric exercise. First, monetary policy is, in average, procyclical in emerging economies after temporary supply shocks. Second, monetary policy is more procyclical in fixed than in flexible exchange-rate regimes. Third, monetary policy is more procyclical in economies with a higher degree of financial openness. The latter result is a central dilemma for emerging economies during supply shocks, since it implies that financial openness prevents less procyclical monetary policy reactions due to the trade-off between exchange rate and income volatility.