International Financial Integration Research Articles

International financial integration and financial stress of emerging market economies: The role of institutional quality

In the wake of unprecedented financial liberalization policies adopted by Emerging Market Economies (EMEs) since the late 20th century, their integration into global financial markets has brought forth both opportunities and challenges. This paper endeavors to assess the intricate relationship between international financial integration (IFI) and financial stress in EMEs, focusing on the potential moderating effect of institutional quality. Addressing key questions, it examines how various IFI indicators impact financial stress and evaluates the role of different dimensions of institutional quality in influencing this relationship. Using a Financial Stress Index (FSI) and employing the panel threshold regression technique, the study unveils significant threshold effects of institutional quality on the IFI-FSI nexus, with variations across different institutional factors. This study underscores the vital need for policymakers to identify threshold levels in institutional quality indicators to strike a balance between attracting investments and preventing unwarranted financial distress.

Fiscal rules, capital controls, and cross-border financial integration

This paper shows that adopting fiscal rules (FRs) decreases the use of capital controls and increases cross-border financial integration. This result is robust to alternative measures of fiscal rules, capital controls, and international financial integration — it is also robust to alternative econometric approaches. It also shows that the adoption of fiscal rules increases financial integration. This paper innovatively employs a formal instrumental variables (IV) approach to tackle the endogeneity of the decision to adopt fiscal rules. The adoption of FRs is instrumented using the age dependency ratio (ADR). This strategy is particularly effective because adopting FRs is more likely when the ADR is relatively low, a finding well established in the empirical literature. Governments impose capital controls to channel domestic savings into the public sector, finance their excessive fiscal deficits, and reduce their borrowing costs. However, the uncertainty over the government's future fiscal policies may lead to capital flight. FRs ‘tie the hands’ of governments and induce them to commit themselves to fiscal discipline. Moreover, FRs can also reduce the government's borrowing costs. These effects of FRs render capital controls less necessary and lead policymakers to lift capital controls, resulting in higher cross-border financial integration.

Cross-border banking and bank stability: evidence from Sub-Saharan Africa

AbstractBased on bank-level data from 29 Sub-Saharan African countries between 2005 and 2019, we apply panel fixed effects (FE) and two-step system GMM estimators to investigate whether increased cross-border banking affects domestic banking sector stability. We find significant evidence that the stability of banks in host countries declines with an increased presence of foreign banks—and the impact is more pronounced on banks that are small and less efficient. The stability impact of foreign banks is also found to depend on the quality of governance institutional factors in the host country. The findings shed some important insights on the downside of financial liberalisation policy in developing countries and the need for increased cross-border collaboration between home and host supervisory authorities in the SSA region—especially in jurisdictions where the foreign bank affiliates are systemically important. The domestic supervisory authorities thus need to effectively manage the inherent trade-off between reaping the benefits from international financial integration while effectively safeguarding domestic banking systems against cross-border contagion and fragility.

International financial integration and financial depth: New evidence from an asymmetry analysis

International financial integration and financial depth: New evidence from an asymmetry analysis

The Role of International Financial Integration in Monetary Policy Transmission

The Role of International Financial Integration in Monetary Policy Transmission

International Comovement in the Global Production Network

Abstract This article provides a general framework to study the role of production networks in international GDP comovement. We first derive an additive decomposition of bilateral GDP comovement into components capturing shock transmission and shock correlation. We quantify this decomposition in a parsimonious multi-country, multi-sector dynamic network propagation model, using data for the G7 countries over the period 1978–2007. Our main finding is that while the network transmission of shocks is quantitatively important, it accounts for a minority of observed comovement under the estimated range of structural elasticities. Contemporaneous responses to correlated shocks in the production network are more successful at generating comovement than intertemporal propagation through capital accumulation. Extensions with multiple shocks, nominal rigidities, and international financial integration leave our main result unchanged. A combination of TFP and labour supply shocks is quantitatively successful at reproducing the observed international business cycle.

Globalisation and governance: Thresholds for the impacts of the main determinants of capital inflows?

This paper investigates whether the impacts of the main push (global financial conditions, GFC) and pull (growth) factors on capital inflows are invariant to endogenously estimated threshold levels for structural domestic conditions (SDC) represented by governance, trade openness, de facto international financial integration and de jure financial openness in emerging market and developing economies. Our results strongly suggest that, for all the components of capital inflows, the impact of the domestic pull factor is substantially much higher for the episodes of better governance, higher trade, de jure financial openness and de facto international financial integration. The sensitivity of non-FDI and aggregate inflows to GFC tends to be considerably higher for the episodes of better SDC. FDI inflows are found to be basically determined by the domestic pull factor across all these regimes. The impact of GFC on FDI inflows appears not to considerably change across the SDC.

International comovements of public debt

AbstractThis study presents evidence of global and regional comovements in public debt and examines their trends and features. We employ a Bayesian dynamic factor model with time‐varying parameters based on the debt‐to‐GDP ratio of 115 countries. We find the global factor accounts for 38 percent of the total variation in the debt ratio worldwide, but its share decreases over time. Countries with more financial openness and a greater share of external public debt are more exposed to global/regional comovements. The assertion that international financial integration encourages higher government borrowing applies primarily to high‐income countries and it does not hold globally.

An old, novel idea: introducing G-Pub, an original dataset of public bank formation

Amidst growing financial internationalization, public banks are a reemerging mode of financial governance that can serve as a policy tool for counter-cyclical crisis financing, proactive investment (e.g. green finance), or protectionist lending. Yet no systematic studies examine what leads governments to form public banks in the first place, in part due to a lack of data. This paper introduces an original dataset, conceptual framework, and descriptive empirical insights to serve as the basis for future research. I discuss contending definitions of public banks to advance the more targeted conceptualization of ‘government-initiated public banks’ (G-Pubs), or banks that are formed by governments and remain under government control through ownership and/or management. The dataset includes 1,355 banks and spans 195 countries for the period 1401–2020. Using these data, I test prevailing assumptions suggesting G-Pubs are more likely to form in less developed or more autocratic countries. I show that for the period 1970–2020, G-Pub formation is instead associated with developed democracies. Descriptive analysis prior to the 1970s further supports a more complex view. These findings underscore the need for a renewed research agenda on public banking that considers both domestic and international political economic dynamics, including international diffusion, financial integration, and crisis mechanisms.

The Role of International Financial Integration in Monetary Policy Transmission

The Role of International Financial Integration in Monetary Policy Transmission

Financial Integration and Structure in Europe: A Comparative Case Study of Bosnia and Herzegovina and Slovenia

The study measures and compares the levels of financial integration in Bosnia and Herzegovina and Slovenia between 2000 and 2020. This study aims to determine the impact of industrial index, gross domestic product per capita, trade openness, and corporate tax rate on the level of international financial integration. The statistical methods employed are unit root tests, OLS regression, the Breusch-Pagan test, and the heteroskedasticity test. For the 20-year time span and annual data for each parameter, the results have shown a significant positive correlation between gross domestic product per capita and financial integration for both countries. The results for Slovenia indicate that financial integration is negatively affected by trade openness and corporate tax rates, whereas gross domestic product per capita and industrial production index affect positively. In the case of Bosnia and Herzegovina, corporate tax rate and industrial production index affect financial integration negatively, while trade openness affect positively but insignificant with financial integration.

Frontier-market economies as a new group of the financial periphery: patterns and transmission channels of global shocks

This paper seeks to fill a gap in the literature on frontier market economies (FMEs) with the following two research questions: (i) Which are the drivers of FMEs’ integration into financial globalisation? (ii) What explains the greater vulnerability of FMEs compared to emerging market economies (EMEs) to global financial shocks? We argue that the emergence of FMEs as a new group of the financial periphery fills a vacuum left for global investors by the major EMEs, whose spreads declined in the past decade due to high foreign currency reserve accumulation and other EME-related factors. To answer the second question, we introduce the concept of financial hierarchy as a second layer of the currency hierarchy: while the currency hierarchy is organized by the different degrees of liquidity premia currencies offer, in the financial hierarchy, not currencies, but financial assets are placed according to the nominal yield. While FMEs’ currencies have a lower liquidity premium than those of EMEs, the difference between them is not vast – as both are not accepted at the international level – and are insufficient to explain FMEs’ greater vulnerability to external financial shocks. We argue in the paper that this vulnerability stems mainly from the position of FMEs’ at the bottom of the financial hierarchy, which results in a different pattern of international financial integration.

Financial integration and economic growth: directional heterogeneity and threshold effect

Despite voluminous studies, the growth effects of international financial integration remain unresolved. Recent studies have shown that the effects depend on a wide variety of factors including the level of economic and financial development, the type of financial flows (debt or equity), the direction of flows (inflows or outflows), and the existence of the investment or saving constraint with the economy. In this paper, we implement a model that embodies double threshold effects where the thresholds are defined in terms of (i) per capita GDP and (ii) the economic growth rate. The results support the single threshold of the growth rate, which is expected to capture the existence of the investment or saving constraint with the economy. We find that developed and slowly developing economies are likely to benefit from capital outflows for higher investment incomes whereas emerging economies with growth rate higher than 3.4—5.7 percent can successfully take advantage of financial integration and resulting capital inflows. The findings are robust to changes in variable definition, model specification and data selection.

THE NEED FOR INTERNATIONAL COOPERATION IN THE FIELD OF FINTECH DEVELOPMENT

The main trend in the field of financial technologies (fintech) is their increasing influence on the global economic order, international relations, as well as changes in organizational and managerial decisions related to their development at the national level. The article proves that these processes are not just a «reassembly» of the financial system on a new technological basis2, but have all the signs and forms of regular international financial integration. The active introduction of financial technologies into the practice of financial integration justifies the need for international cooperation in this area at a qualitatively different level, taking into account the convergence of technologies and the specifics of national models of fintech development. The results of the study of trends in international relations and forms of their coordination in the field of fintech development are presented: from the formation of intersectoral and interregional ecosystems to international agreements, alliances and coalitions. The stages of international financial integration and their corresponding forms and areas of coordination are highlighted.

The impact of regulatory quality on deepens level of financial integration: Evidence from the European Union countries (NMS-10)

Abstract This study seeks to empirically explore whether the regulatory quality in the NMS-10 impacts deepening international financial integration and whether the strengthening of regulatory quality for NMS-10 has a causal effect on the level of international financial integration (IFI) in NMS-10. The study covers NMS-10 between 1995 and 2020. The estimation of parameters was made with descriptive statistics, the Breusch-Pagan test, the Pesaran test, the Granger causality test, and OLS regression to analyze the impact of REQ on IFI. The findings of the study reveal that regulatory quality has a statistically significant effect in deepening the process of financial integration for both periods, in the pre-accession and post-accession EU process. In addition, the results demonstrate that the regulatory quality of NMS-10 provides sound laws and policies that support the business environment, encourage cross-bordering financial transactions. Moreover, the results of the Granger causality test show that the level of global financial integration is causally impacted by the improvement in NMS-10 regulatory quality. This indicates that regulatory effectiveness might predicts international financial integration.

Effects of International Financial Integration on Economic Growth in Developing Countries: Heterogeneous Panel Evidence from Seven West African Countries

From the existing literature, there is no consensus on the effects of financial integration on economic growth. The studies have mostly focused on country samples without taking into account country heterogeneity, or have been limited to a causality study. This paper examines the effects of international financial integration on economic growth in seven West African Economic and Monetary Union’s countries (WAEMU)[i], over the period 1980 - 2019. Methodologically, the study applies heterogeneous panel techniques taking into account inter-individual dependence (MG, CCEMG and AMG). The results show that the stock of external debt and the opening of the capital account negatively affect long-term economic growth in the WAEMU region. The country analysis confirms the panel results for Benin, Burkina Faso and Mali. Sectoral misallocation of external capital could be a plausible explanation. The economies of WAEMU countries are mostly dominated by the service sector, which contributes more to their GDP than the productive sectors, i.e. agriculture and industry. While the agricultural sector, which employs a large part of the active population, is still traditional and does not benefit from capital inflows, the industrial sector is still embryonic. [i] Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. In this study, we have removed Guinea-Bissau due to lack of data over a large part of the period.

International financial integration: Too much?

According to theory, financial openness (FO) increases growth. The literature often conditions the growth effect of FO on favorable collateral environment. However, this can conceal the actual growth benefits of FO. This paper contributes to the literature by investigating the unconditional growth effect of FO, measured as de facto international financial integration (IFI). We maintain that the level of IFI might affect the structure of this relationship. We examine this important issue in advanced and emerging market and developing economies over the 990-209 period using conditional and unconditional growth regressions. Panel fixed effects threshold and dynamic panel threshold estimations suggest that the IFI-growth relation is conditional on data-driven estimated threshold level of IFI. Accordingly, IFI encourages (impedes) growth in less (more) financially integrated economies. The results show that it is not impossible to finance growth with IFI, but it might be risky, especially beyond a certain threshold level of IFI.

Corporate Taxation and International Financial Integration: U.S. evidence from a consolidated perspective

Abstract We document a robust relation between corporate tax differentials and US international financial integration (IFI). While this is the case for traditional IFI based on cross-border positions, the positive link also emerges for its larger consolidated-by-nationality version. The gap between these IFI measures, the key outcome variable in our analysis, exhibits a strong positive correlation with tax differentials too. This is in part due to consolidated assets of multinational enterprises being more strongly correlated with tax differentials than their cross-border counterpart. We interpret this as indirect evidence of US multinationals taking advantage of tax differentials in ways that go beyond what is captured by traditional Balance of Payments procedures. JEL: F36, F21, F23, H87.

The Role of International Financial Integration in Monetary Policy Transmission

The Role of International Financial Integration in Monetary Policy Transmission

Environmental agenda and priorities for integration cooperation in the development of financial technologies at the global and national levels

The active application of financial technologies in the processes of international financial integration actualises the search for the formation of national models of financial technology development, ensuring sovereignty with effective international cooperation. Considering the forms and directions of relations coordination at the level of emerging alliances of national models of fintech development, the article analyses the directions and forms of coordination in the sphere of financial technology development at the level of interstate unions, alliances and coalitions, and systematises the priorities of integration cooperation in the sphere of fintech. Based on the ways of participation in the processes of global financial integration, the study establishes strategic alternatives for the formation and development of national models, conditioned by approaches to the management of fintech development at the national level, on the basis of which the prospective priorities of the Russian segment of the development of financial technology are presented at the intersectoral and international levels.