International Financial Openness Research Articles

The impact of financial openness on public debt in developing countries

This article studies the impact of international financial openness on the public debt-to-output ratio in a representative sample of 37 developing countries from 1970 to 2015. We find that it is important to distinguish between the financial openness in the home country and that in the rest of the world, and distinguish between the external and domestic component of public debt. Our result shows that financial openness in the home country reduces the external and total public debt. Differently, financial openness in foreign countries increases the external public debt in the home country. Further analysis shows that the effect of home country financial openness can be explained by the substitution between external public debt and alternative external financing channels of the country; the effect of foreign countries’ financial openness can be explained by the substitution between external and domestic public debt.

International gross capital flows: New uses of balance of payments data and application to financial crises

Most studies of international financial openness and crises link economic performance to either the net inflow of capital or the gross inflow (outflow) defined as the change in foreign (domestic) holdings of domestic (foreign) assets over a period. In this paper we decompose the net inflow into four rather than two components. We show that the four-way decomposition provides a better understanding of six recent financial crises and predicts sudden stops better than a standard two-way decomposition. We conclude that four-way decompositions can be more informative than either the net capital inflow or two-way decompositions of the net inflow.

Financial openness, disclosure and bank risk-taking in MENA countries

In this paper, we analyze the risk-taking behavior of banks in emerging economies in a context of international capital mobility. Our paper highlights a new channel through which depositors can exercise pressure to control risk-taking. Depositors can reallocate their savings away from their home country to the more protective system of a developed economy. We recover a classical result according to which increased competition resulting from more international financial openness induces banks to take excessive risks. We find however that sufficiently high financial openness is necessary for a positive link between financial transparency and safe risk management. Finally, we test the relationship between disclosure, financial openness and bank risk-taking for a panel of 258 banks from the MENA region and Turkey.

International Financial Integration, Investment and Economic Performance in Sub-Saharan African Countries

This paper examines the issues of international and regional financial integration and its impact taking a sample 25 SSA countries. The research tests both the direct and indirect channels through which the impact of financial integration works and is transmitted to the real economy. Directly, it is argued that financial openness affects economic growth through enabling access to foreign financial markets, increasing financial service efficiency and helping in diversification of risks and consumption smoothing. Thus while inducing additional capital investment, it also fosters macroeconomic discipline. Indirectly, the process of international financial integration facilitates the transfer of technological know-how, promotes trade and enhances specialization. While financial openness of recent years has laid a strong foundation to consolidate financial integration between regions and with international financial markets, we do not observe a robust link between financial openness and economic growth in SSA region. The empirical analysis considers the possibility of a positive indirect effect, and we report evidence in favour of the indirect transmission root. From our results, we observe a positive and statistically significant association between international financial integration and financial development under all its selected indicators. This finding suggests that financial capital market integration aids growth indirectly through promoting domestic financial markets. The study reports evidence suggesting that good institutions, higher level of human capital, and stable macroeconomic environment play an important role in mitigating the negative impacts of international financial openness.

How Do Domestic Financial Liberalization and Financial Openness Affect Corporate Leverage and Debt Maturity?

We assess the impact of domestic financial liberalization and international financial openness on leverage and debt maturity in a large panel of publicly traded non-financial firms in 22 advanced and 16 emerging market countries over the period 1994-2002. Financial liberalization is measured with a new index that tracks six separate dimensions of reform. Financial openness is measured using international liabilities of the private sector. We find that financial liberalization and openness lead to more leverage and longer debt maturity in advanced market countries. In emerging market countries, financial openness leads to an increase in leverage and a reduction in debt maturity, whereas financial liberalization reduces leverage and its effect on debt maturity depends on the type of reform.

Financial Reforms, Financial Openness, and Corporate Borrowing: International Evidence

We study how credit market deregulation and increased international financial openness have changed corporate borrowing. The evidence comes from a large panel of publicly traded firms in 38 countries over the period 1994-2002. Reforms are measured with a comprehensive new index that tracks six separate dimensions. We find that these transformations have increased leverage and lengthened debt maturity in advanced economies, as expected, suggesting that in these countries corporate credit markets have become deeper. In emerging economies, the picture is more mixed: more international openness has led to more leverage but shorter debt maturity. Financial sector reforms have reduced leverage, while their effects on debt maturity have differed depending on the type of reform. Importantly, the differential impact of openness and reforms on the leverage and debt maturity of firms in advanced and emerging market countries also emerges when we distinguish between firms that are potentially financially constrained and firms that are not. These findings suggest that in emerging economies fundamental institutional weaknesses make it difficult to secure the benefits of international financial openness and domestic financial reforms.

The Impact of Domestic Financial Liberalization and International Financial Openness on Corporate Leverage and Debt Maturity

The Impact of Domestic Financial Liberalization and International Financial Openness on Corporate Leverage and Debt Maturity

Financial Reforms, Financial Openness, and Corporate Borrowing: International Evidence

We study how credit market deregulation and increased international financial openness have changed corporate borrowing. The evidence comes from a large panel of publicly traded firms in 38 countries over the period 1994-2002. Reforms are measured with a comprehensive new index that tracks six separate dimensions. We find that these transformations have increased leverage and lengthened debt maturity in advanced economies, as expected, suggesting that in these countries corporate credit markets have become deeper. In emerging economies, the picture is more mixed: more international openness has led to more leverage but shorter debt maturity. Financial sector reforms have reduced leverage, while their effects on debt maturity have differed depending on the type of reform. Importantly, the differential impact of openness and reforms on the leverage and debt maturity of firms in advanced and emerging market countries also emerges when we distinguish between firms that are potentially financially constrained and firms that are not. These findings suggest that in emerging economies fundamental institutional weaknesses make it difficult to secure the benefits of international financial openness and domestic financial reforms.

Partisanship and the Path to Financial Openness

The effect of traditional left-right economic preferences on countries’ international financial openness is more subtle than existing studies have recognized. The authors investigate the role that partisan politics played in the liberalization of international financial markets within 12 Western European democracies from 1960 to 1986. The authors find that right governments tended to be active liberalizers of the capital account. They were more likely than left governments to enact liberalizations, and liberalizations were especially likely when new right governments entered office. Left governments typically acquiesced to these changes. Although less likely to enact liberalizations, they were no more likely to impose new restrictions. The authors’ findings are consistent with studies that show how financial integration does not undermine welfare states but is still subject to partisan contention.

Explaining Capital Account Liberalization in Latin America: A Transitional Cost Approach

In the past three decades governments around the world have lowered barriers to international capital flows. This movement is widely attributed to the forces of globalization, as developed nations moved toward relative convergence on international financial openness. Yet developing nations with much to gain from openness to foreign investment moved only hesitantly and inconsistently in this direction. Analysis of two decades of capital account liberalization in Latin America and the OECD reveals that nations in Latin America with weaker domestic financial sectors face higher risks of transitional dislocations following liberalization and move less aggressively toward openness. In the OECD, by contrast, financial weakness is associated with greater movements toward capital account opening, as transitional costs are lower and governments are better equipped to ameliorate them. Examination of the transitional costs of liberalization thus helps to explain how market pressures may impede, rather than promote, market-oriented reform in Latin America.

Capital account liberalization and inflation

Evidence from over 100 countries suggests a strong link between capital account openness and lower inflation. In particular, widespread capital account liberalization during the early 1990s appears to have contributed to the world-wide disinflation observed during that decade. Alternative indices of capital account openness, including those of Quinn and Toyoda [Measuring International Financial Openness and Closure, Department of Political Science, Georgetown University, Washington, DC, 1996, mimeo] yield similar results.

Globalization, government spending and taxation in the OECD

Abstract. This article assesses the impact of globalization on welfare state effort in the OECD countries. Globalization is defined in terms of total trade, imports from low wage economies, foreign direct investment, and financial market integration. Welfare effort is analyzed in terms both of public spending (and separately on social service provision and income transfer programs) and taxation (effective rates of capital taxation and the ratio of capital to labor and consumption taxes). Year–to–year increases in total trade and international financial openness in the past three decades have been associated with less government spending. In contrast, integration into global markets has not been associated either with reductions in capital tax rates, or with shifts in the burden of taxation from capital to consumption and labor income. Moreover, countries with greater inflows and outflows of foreign direct investment tend to tax capital more heavily.

The Origins of Financial Openness: A Study of Current and Capital Account Liberalization

Theory: We assess the determinants of the national regulation of international finance, or the comparative degree of national financial openness or closure. Hypotheses: Partisanship interacts with a nation's factor endowments to account in part for different international financial policies by governments of the same partisan hue. Methods: We offer a quantitative measure of international financial openness, or current and capital account regulation, for 21 member countries of the Organization for Economic Cooperation and Development for 1950-88. We use regression analysis employing Panel Corrected Standard Errors to discover the determinants of financial openness. Results: Our main finding is that political partisanship substantially explains openness, but does so in complex ways. Differences in both political institutional arrangements and types of political economy also account for part of the differences in international financial regulation.