Measures Of Financial Openness Research Articles

Exposure to Dollar, financial Openness, and the heterogeneous impact of US monetary spillover

This paper studies how country heterogeneities, especially in their (1) net exposure to dollar debt and (2) financial openness affect the propagation of US monetary shocks into peripheral advanced and emerging economies. We contribute to the understanding of how interest rate and GDP responses of emerging countries depend on both their dollar liability and financial openness, as well as the interaction between these two factors. Specifically, we find that economies with higher debt dollarization have higher interest rate responses to contractionary US monetary shocks to prevent negative balance sheet effects. We also find that GDP decreases by more for economies with high debt dollarization if their financial openness is high. Using capital control as the de jure measure of financial openness, we obtain similar results that GDP decreases by more for countries net short of dollar if capital control is low, and at the same time, GDP is higher for countries with higher capital control if they are more indebted in dollar. Combined, these imply that capital control helps dampen negative US monetary spillover, and the benefit from imposing capital control is larger for countries that are more indebted in dollar.

Financial openness and fintech credit

This study explores the link between fintech credit and de facto measures of financial openness, which has been largely overlooked in the existing literature. We utilise a new and comprehensive panel dataset consisting of a direct measure of fintech credit, allowing us to conduct a cross-country analysis of more than 78 countries between 2013 and 2019. Using a series of panel data estimation models, we provide robust evidence that an increase in all main components of total external liabilities leads to an increase in fintech credit volumes. Based on the empirical results, we highlight that each external liability component affects fintech credit volumes through certain channels and mechanisms.

Financial openness, financial sector development, and income inequality: With an extensive set of pull and push factors

AbstractThis paper investigates the impact of financial openness on financial sector development and income inequality. We use the de jure and de facto measures of financial openness across 78 countries from 1980 to 2019. By employing a system generalized method of moments (GMM) with 5‐year averaged data and a novel push and pull modeling framework, we obtain three key results. First, the de jure measure of financial openness exacerbates income inequality and is sensitive to banking crises and conflict intensity. Second, the de facto measure spurs stock value traded in emerging market economies (EMEs) and declines domestic credit in Africa. Third, the interaction between de facto measures with schooling and governance factors affects financial sector development and income inequality. We highlighted that the mere usage of the de jure measure and their interaction is incorrect. The key implication is that valuable information about the real impact of openness can be obtained from the de facto measures and their interaction with favorable macroeconomic fundamentals, governance factors, and adverse nonpolicy factors.

TRADE, FINANCIAL LIBERALISATION AND CURRENT ACCOUNT BALANCE IN NIGERIA

This paper examines the individual and interactive impacts of trade and financial liberalization on Nigeria’s current account balance between 1986 and 2019. An autoregressive distributed lag technique is used to investigate the short- and long-run effects of the de facto measure of trade openness and the de jure measure of financial openness by Chinn-Ito on the current account. The finding suggests that financial liberalization, in particular, has an insignificant negative effect on the current account, whereas trade has a non-significant positive impact in the long-run. The interaction of the variables in the long-run produces significant positive influence on the account. The short-run effects show a positive impact of financial liberalization, whereas the interplay of the variables has a negative impact on the current account. The study concludes that the interaction of trade and financial liberalization is critical in improving the current account balance in Nigeria.

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.

Sectoral analysis of productivity in the developing and developed economies of Asia-Pacific

PurposeThe study aims to empirically investigate the trends and determinants of labour productivity of the two broad sectors –industry and services – and their components, namely, manufacturing and market services sectors, in the case of major developing and developed economies of Asia-Pacific over the period 1980-2014 and make a comparison thereof.Design/methodology/approachThe study uses econometric methodology of panel unit root tests, panel cointegration and group-mean full modified ordinary least squares (FMOLS).FindingsThe study finds that while capital deepening, government size, institutional quality, productivity of the other sector and financial openness affect productivity of all the sectors significantly, the impact of human capital and trade openness varies across sectors in the case of developing economies. Furthermore, the impact of technological progress becomes significant in the post-liberalization reforms period in the developing economies. The study further finds that capital deepening, human capital, government size, institutional quality, productivity of the other sector, government size and trade openness are significant determinants of productivity of all sectors of developed economies under consideration. However, the impact of technological progress is stronger for manufacturing sector than services and its components. Furthermore, while both equity and debt liabilities (as measures of financial openness) influence sectoral productivity of industry and manufacturing sectors positively and significantly in case of developed economies, only equity liabilities have a significant influence on the productivity of developing economies. This may indicate existence of more developed financial markets in the case of developed economies.Originality/valueThe study identifies important structural differences in determinants of productivity both across sectors and across developing and developed economies of Asia-Pacific.

Do Trade Liberalisation and Financial Development Affect Macroeconomic Volatility? Evidence from Africa

The study investigates the effect of financial development and trade liberalisation on macroeconomic volatility in Africa between 1980 and 2017. The study employed panel data, de jure and de facto measures of financial openness and three estimation techniques (pooled Ordinary least square method [OLS], fixed effect and dynamic general method of moment [GMM]) to analyse the data. Results show that increased financial openness also leads to increased income volatility for the de jure measure of financial openness while for the de facto measure increased financial openness reduces income volatility. Results also show that financial openness leads to subtle volatility of output growth in Africa. The results contradict the argument that more financial openness leads to lower volatility in consumption in Africa. Furthermore, investment volatility responded to the measures of financial openness in different ways. The study conclude policymakers should focus more on policies that will foster financial system development as it has shown to be very effective in reducing macroeconomic volatility in Africa.

Financial development and environment in South Asia: the role of institutional quality.

The paper investigates the effect of financial development and institutional quality on the environment in South Asia. Other determinants of environmental quality included are economic growth, energy consumption, FDI, trade openness and institutional quality. For empirical analysis, panel data is used for the period 1984 to 2015. The estimated results indicate that Environmental Kuznet Curve (EKC) hypothesis holds in South Asia, i.e., environment first deteriorates with economic development and then it starts improving. Empirical results reveal that 1% increase in economic growth worsens environment by 1.709%. However, further increase in economic growth improves environment by 0.104%. Energy consumption has deteriorating effect on environment. Financial development has degraded the environment in the region, which indicates that South Asian countries have used financial development for capitalization and not to improve technology. The estimated results show that 1% increase in financial development deteriorates environment by 0.147%. FDI, which is a measure of financial openness, has mitigating effect on pollution. In turn, trade openness has worsened the environmental quality in the region. Institutional quality has significant negative effect on carbon emissions. It also has significant negative moderating effects on carbon emissions. The findings show that 1% improvement in institutional quality will decrease pollution by 0.114%. The study suggests that South Asian countries should focus more on technology effect and not on scale effect of financial development.

Financial openness, risk and bank efficiency: Cross-country evidence

This paper assesses the interrelationship between financial openness, bank risk and bank profit efficiency using a cross-country sample of 2007 commercial banks covering 140 countries over the period 1999–2011. To establish whether the impact of financial openness on both bank risk and profit efficiency occurs directly or through each one of the two bank characteristics (efficiency and risk, respectively), we begin our analysis by investigating the potential reverse Granger causality between profit efficiency and risk using a dynamic simultaneous model via system GMM estimation. We then account explicitly for the role of bank risk in the estimation of bank profit efficiency using stochastic frontier analysis, allowing for the influence of different measures of financial openness and risk alongside other control variables. Our results indicate that financial openness reduces bank profit efficiency directly, not through changes in bank risk. We also find that financial openness increases bank risk indirectly, through the decreased bank profit efficiency channel.

The Financial Trilemma and Macroeconomic Instability: Empirical Evidence from Kenya

The purpose of the study is to test whether the financial trilemma holds for a small open economy, and examine the implication of the implicit financial trilemma configuration on macroeconomic instability using Kenyan data. First, the study constructs the trilemma and macroeconomic instability indices and tests the financial trilemma. Second, the study empirically examines the effect of financial trilemma on macroeconomic instability. The results show that the financial trilemma does not hold for Kenya. However, by using the overall foreign participation to total equity turnover as a measure of financial openness, the trilemma indices are statistically significant. The results imply that the increasing financial openness is potentially driving the Kenyan economy towards financial trilemma characterized by a delicate balance of improving monetary independence and exchange rate stability. Financial openness is associated with increased macroeconomic instability. International reserve accumulation acts as a buffer and does not cause macroeconomic instability, implying that the Central Bank of Kenya conducted effective sterilization during the study period. This is the first study to test for the financial trilemma using Kenyan data. This study differs from other similar studies in a number of important ways. First, the study construct alternative financial trilemma indices that reflect the various reforms taking place in Kenya. Second, the study uses a unique data set based the newly released quarterly GDP data unlike most other studies that depend on annual data.
 JEL Classifications Code: F31

Does financial openness explain the increase of global imbalances before the crisis of 2008?

We investigate whether financial openness has played a major role in the evolution of global imbalances over the period before the crisis of 2008. We estimate, with panel regression techniques, the impact of financial openness on medium run trends in current account imbalances for industrialized and emerging countries by using a de jure measure of financial openness and a de facto measure of financial openness. Nowadays, current account imbalances are larger in reason of higher capital mobility. Nevertheless, a large part of imbalances may be considered as unrelated with the evolution of macroeconomic fundamentals.

Infrastructure versus other investments in the global economy and stagnation hypotheses

This paper uses data drawn from 10 000 global companies in 75 advanced and emerging countries to look at trends in infrastructure and other non-financial industries in light of the talk of stagnation. There appears to be a twin paradox in the global economy: some companies and industries are possibly over-investing, driving down returns on equity (ROEs) versus the cost of capital and creating margin pressure globally, while others carry out too little long-term investment in favour of buybacks and the accumulation of cash. This pattern is associated with a shift in the centre of gravity of world economic activity towards emerging markets. Most of the over-investment appears to be occurring in the extremely strong growth of emerging market sales and investment in non-infrastructure companies, much of which is being financed from rapidly growing debt since the financial crisis. Global value chains, emerging market policies of financial repression, low interest rates, taxation incentives, natural resource endowments and other factors determine where investment is stronger and where it is restrained. Potential problems of debt-financed over-investment in non-infrastructure industries in emerging markets and the incentives for buybacks are identified as major policy issues that need to be addressed if sustainable growth is to be achieved. Evidence on the role of causal factors (sales, GDP, the return on equity, the cost of equity and debt and a measure of financial openness) on corporate capital spending is presented. Finally some policy recommendations are made. JEL classification: F21, G15, G18, G23 Keywords: Global economy, infrastructure, investment, listed companies

Measures of financial openness and interdependence

PurposeThe purpose of this paper is to review concepts and measurements related to financial globalization such as financial openness, financial integration, monetary interdependence, and the mobility and movement of capital.Design/methodology/approachThis paper surveys the theoretical and empirical literature on monetary interdependence and financial globalization. The major ways in which these concepts are measured empirically are presented and critiqued.FindingsDisagreements about the degree of financial integration and capital mobility are, in part, explained by the different approaches to measuring these concepts. One major challenge in obtaining a good measures is controlling for other major factors that may influence observed correlations among financial variables. While these relationships still cannot be estimated precisely, it can be safely said that while high for many countries, few if any financial markets are perfectly integrated across countries.Originality/valueBy offering a comprehensive analysis of these different measurements, the paper underscores the different implications for national policies and the operation of the international monetary system of different dimensions of globalization. In particular, the proposition that financial globalization has left most countries with little autonomy for domestic monetary policy is subject to serious debate, at least in the short run.

Assessing Measures of Financial Openness and Integration

Researchers have available to them numerous indicators of financial openness and integration, many of which have yielded substantially differing results in past research, for example, on the relationship of financial openness or integration with economic growth. This article reviews the main indicators and finds that de jure vs. de facto indicators yield systematically different growth results. Among de jure indicators, sample differences account for much of the variation in growth results, with a weaker impact found in more recent data and among advanced economies. It also finds that many indicators capture different and useful facets of financial openness, such as intensive vs. extensive measures, and de facto vs. de jure. A small minority of indices suffer weaknesses that make them not useful for rigorous economic analysis, most notably the Investment Freedom Index by the Heritage Foundation.

The trade-off between liberalisation policy and financial crises dynamics

In this paper, we attempt to check the extent to which a quick and a rushed liberalisation process is a determining and an explanatory factor of financial crises. With reference to the state space model and Kalman filter technique, we were able to elaborate a new measure of financial openness for the South East Asian countries. This measure is first used to raise the financial openness pace already ill-adapted by these countries during the 1997 crisis. Second, we created a measure of financial instability during the (1990-2008) period. The results led us to the conclusion that a rapid liberalisation process may be a crises-provoking factor. Ten years later, the international financial sector has been hit by a major financial crisis. Some southern Mediterranean countries have been relatively spared the ordeal. Applying these measures on the Tunisia context period, we reached the conclusion that a moderately-paced liberalisation process is a way of avoiding devastating financial situations.

Consumption volatility and financial openness

Economic theory predicts that the integration of financial markets lowers the volatility of consumption. In this article, we study long-term trends in the consumption volatility of the G7 countries. Using different measures of financial openness, we find evidence that greater financial openness has been associated with lower consumption volatility. However, volatility of consumption relative to output has not declined.

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How Does Financial Openness Affect Economic Growth and its Components?

This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases.

A New Measure of Financial Openness

We create a new index that measures the extent of openness in capital account transactions. Despite the abundance of literature and policy analyses regarding the effect of financial liberalization, the debate is far from settled. One of the reasons for that outcome is the lack of proper ways of measuring the extent of the openness in cross-border financial transactions. We seek to remedy this deficiency by creating an index aimed at measuring the extensity of capital controls based on the information from the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). This paper details how we construct the data and where our index stands in relation to the extant literature. Given the intricacy of capital controls policies and regulations, the exercise of quantifying the extent of financial openness remains a challenging task. Nonetheless, our index makes a substantial contribution in terms of its coverage of countries and time period; the data are available for 181 countries for the 1970–2005 period.

The Effects of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980–1999

Empirical studies measuring the impact of globalization on social spending have appeared recently in leading journals. This study seeks to improve upon previous work by (1) employing a more sophisticated and comprehensive measure of financial openness; (2) using a more accurate measure of trade openness based on purchasing power parities; and (3) relying on social spending data that are more complete than those used by previous studies on Latin America. Our estimates suggest that several empirical patterns reported in previous work deserve a second look. We find that trade openness has a positive association with education and social security expenditures, that financial openness does not constrain government outlays for social programs, and that democracy has a strong positive association with social spending, particularly on items that bolster human capital formation.