## _wp06189 - Executive Summary

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### Principal conclusions
- Financial globalization can benefit developing countries, but with many nuances; extreme polemic claims on both sides are difficult to substantiate.
- Financial globalization by itself almost certainly does not lead to economic crises.
- The main benefits of financial globalization are often indirect and catalytic rather than direct capital-financing effects.
- There is a tension: financial globalization can catalyze collateral benefits that raise long-run growth, but premature opening without supporting conditions can delay these benefits and increase vulnerability to sudden stops.

### Conceptual framework and collateral benefits
- Traditional channels emphasized:
  - More efficient international allocation of capital.
  - Capital deepening.
  - International risk-sharing → GDP growth and lower consumption volatility.
- Alternative (collateral benefits) perspective:
  - Financial globalization can catalyze:
    - Financial market development.
    - Institutional development and better governance.
    - Macroeconomic discipline.
  - Empirical implication: collateral benefits take time to materialize and may be hard to detect in cross-country regressions that control for institutions, policies, and financial development (because these are mechanisms through which openness operates).

### Thresholds and tensions
- Threshold conditions shaping macroeconomic outcomes (Figure B):
  - Financial market development.
  - Institutional quality, governance.
  - Macroeconomic policies.
  - Trade integration.
- Outcomes by threshold status:
  - Above thresholds → financial globalization more likely to improve GDP/TFP growth and reduce crisis risks.
  - Below thresholds → premature liberalization can increase crisis risk and delay collateral benefits.
- Deep tension: many threshold conditions are themselves potential collateral benefits, creating bidirectional dynamics.

### Measurement of financial openness
- De jure measures:
  - Binary or finer indices based largely on IMF AREAER; examples: 0/1 measures, Quinn indices, Chinn and Ito principal components, Mody and Murshid measures.
  - Shortcomings:
    - May reflect restrictions on foreign exchange transactions that do not impede capital flows.
    - Do not capture enforcement intensity.
    - May diverge from de facto integration.
- De facto measures:
  - Price-based measures face practical problems (risk and liquidity premia, thin markets).
  - Quantity-based measures preferred: gross stocks of foreign assets and liabilities (sum of gross assets and liabilities as ratio to GDP) are less volatile and meaningful for risk sharing.
  - Dataset used: Lane and Milesi-Ferretti dataset — stocks of gross liabilities and assets for 145 countries covering 1970–2004.

### Patterns of financial globalization (stylized facts)
- Surge in de facto financial globalization since mid-1980s; emerging markets account for the lion’s share of inflows to developing economies.
- Composition shifts (selected exact figures):
  - Share of debt in gross stocks of foreign assets and liabilities fell from 75 percent in 1980–84 to 59 percent in 2000–2004.
  - Emerging markets: share of FDI and portfolio equity rose from 13 percent in 1980–84 to 37 percent in 2000–2004.
  - Industrial countries accounted for 91 percent and emerging markets for 8 percent of total outstanding foreign liabilities at end-2004.
- Flows:
  - FDI and portfolio equity have become dominant for new flows into developing economies; debt still accounts for more than half the stock of all external liabilities.
- Volatility:
  - Gross inflows of debt financing are substantially more volatile than FDI or equity inflows (cross-country averages of standard deviations over 1985–2004).
  - Coefficients of variation give mixed results; some sensitivity to small-sample distortions.

### Macroeconomic evidence on effects
- Growth:
  - Majority of empirical cross-country studies do not find robust evidence that capital account liberalization alone increases growth.
  - Studies using de facto measures, finer de jure measures, micro data, longer samples, or interaction terms for supportive conditions tend to find more positive effects.
  - Once institutional, policy, and financial development variables are controlled for, the independent effect of openness often diminishes.
  - Specific findings:
    - No systematic relationship between average de facto financial openness and growth during 1985–2004 once controls are included.
    - Weak positive association between change in financial openness (1985 to 2004) and average GDP growth, which vanishes after controlling for other determinants.
- Volatility and crises:
  - Little formal empirical evidence that capital account liberalization by itself caused the spate of crises in the last three decades.
  - Some studies find capital account openness reduces probability of currency crises after accounting for selection bias.
  - Banking crises account for about one-third of financial crises over the last three decades and tend to have larger output costs than currency crises; banking crises can predict future currency crises.
  - No systematic relationship between financial openness and output volatility in aggregate cross-country studies.
  - Kose, Prasad, and Terrones (2003b): for emerging markets, the ratio of consumption growth volatility to income growth volatility increased during the recent globalization period; relative consumption volatility increases with degree of financial openness up to a threshold, above which countries can achieve better consumption smoothing.
- Comovement:
  - Financial integration associated with increased synchronicity of business cycles and a greater role for global factors in fluctuations for industrial and some emerging economies.
  - Evidence mixed on whether cross-country consumption correlations rose in the 1990s; some studies find consumption comovement did not increase on average in the 1990s for developing economies.

### How the composition of capital flows matters
- General principle: not all flows are equal; equity-like flows (FDI and portfolio equity) are presumed to be:
  - More stable and less prone to reversals.
  - Carriers of collateral benefits (technology, management, governance improvements).
- Portfolio equity:
  - Macro evidence: several studies find equity market liberalizations increase GDP growth:
    - Bekaert, Harvey, and Lundblad (sample of 95 countries, 1980–97) → equity liberalizations increase GDP growth by about 1 percentage point.
    - Li (2003): longer sample → 0.6 percentage point increase in GDP growth.
    - BHL sensitivity checks reduce magnitude but still find effects in range of 0.7–0.9 percentage points.
  - Micro evidence:
    - Post-liberalization industries more dependent on external finance grow faster (Gupta and Yuan; Hammel).
    - Firm-level capital stock growth: Chari and Henry find post-liberalization capital stock growth exceeds pre-liberalization mean by an average of 5.4 percentage points in the three-year period following liberalization.
    - Mitton finds firms open to foreign investors register higher sales growth, investment, efficiency, and lower leverage.
  - Caveat: macro results may capture coincident reforms; most measures are de jure.
- FDI:
  - Theory: FDI should provide technology spillovers, managerial transfers, and stability.
  - Macro evidence mixed; positive effects often conditional on initial conditions (human capital, financial development, trade openness).
  - Carkovic and Levine (1960–1997 panel): after controlling for joint determination, no robust causal effect of FDI on growth.
  - Micro evidence: vertical (backward/forward linkage) spillovers more robust:
    - Javorcik (Lithuania): 10 percent increase in foreign presence in downstream sectors → 0.38 percent increase in output of firms in supplying industry.
- Debt flows:
  - Debt flows (portfolio bonds, bank loans) generally viewed as riskiest:
    - Debt share in gross stocks fell from 75 percent (1980–84) to 59 percent (2000–2004), but debt remains significant.
    - Debt inflows typically more volatile and procyclical.
    - High levels of short-term external debt in foreign currency increase crisis vulnerability; short-term debt/reserve ratios predict crises.
    - Rodrik and Velasco: countries with larger short-term debt stock than reserves are three times more likely to experience sudden and massive reversals.
  - Counterarguments:
    - Short-term debt can be a liquidity device in low-quality investment environments (Diamond and Rajan).
    - Short-term debt may serve as a commitment device (Jeanne).

### Micro versus macro evidence and costs of capital controls
- Micro (firm/industry) studies often reveal efficiency costs of capital controls and benefits of openness that aggregate cross-country regressions mask.
- Evidence on costs of controls:
  - Capital controls cause distortions and evasion, reduce market discipline, and impose administrative costs.
  - Firm-level evidence (Desai, Foley, Hines): multinationals face about 5 percentage points higher interest rates under capital controls.
  - Capital controls reduce FDI and raise cost of capital at firm level.
- Joint analyses of flow types:
  - FDI and portfolio equity tend to be associated with higher growth; portfolio bond flows and official flows less so.
  - Foreign bank lending may be negatively associated with growth unless local banks are well capitalized.

### Organizing principles for policy and research
- Collateral benefits perspective:
  - Financial opening can catalyze financial sector development, institutional improvements, governance, and macroeconomic discipline.
  - Because these operate indirectly and over time, short-run evidence may understate benefits.
  - Regression strategies that control for the channels of interest may mechanically remove the explanatory role of openness.
- Thresholds:
  - Supportive conditions (financial depth, institutions, macro policies, trade openness) matter for realizing benefits and limiting risks.
  - Policy implication: sequencing and pacing of liberalization should account for domestic readiness; yet openness itself can help foster readiness.
- Composition matters:
  - Policy should consider the composition of flows: encouraging FDI and equity investment may enhance collateral benefits, while being mindful of risks from short-term foreign-currency debt.

### Threshold effects: four interacting dimensions and empirical findings
- Four threshold dimensions that interact with financial globalization to determine macroeconomic outcomes:
  1. Financial sector development.
  2. Overall institutional quality.
  3. Macroeconomic policy framework.
  4. Trade integration.
- Selected empirical findings:
  - Financial sector development:
    - Hermes and Lensink (1970–95): a threshold level of financial sector development is required to enjoy FDI growth benefits.
    - Alfaro, Chanda, Kalemli-Ozcan, and Sayek (2004): stronger growth impact of FDI when financial sectors are well developed.
    - Mishkin (2006) and Ishii et al. (2002): stronger financial systems helped avoid crises after liberalization; weak systems suffered crises.
  - Institutions and governance:
    - Klein (2005): non-monotonic interaction—capital account openness boosts growth for countries with better (but not the best) institutions; upper-middle-income countries benefit most.
    - Alfaro, Kalemli-Ozcan, and Volosovych (2006): institutional quality is the most important factor determining capital flows to developing countries.
    - Wei (2000c): higher corruption reduces inward FDI substantially.
    - Faria and Mauro (2005): better institutional quality associated with a higher share of equity-like liabilities in total external liabilities.
  - Macroeconomic policies:
    - Mody and Murshid (1979–99, 60 countries): financial flows have stronger impact on investment growth where macro policies are better.
    - Arteta, Eichengreen, and Wyplosz: positive growth effects of openness occur only when macroeconomic imbalances (e.g., black market premium) are eliminated.
    - Fixed exchange rates with open capital accounts often increase vulnerability to crises; flexible regimes or stringent preconditions for pegs are advised in many contexts.
  - Trade openness:
    - Trade integration reduces the probability of sudden stops and mitigates crisis costs.
    - Calvo, Izquierdo, and Mejia; Frankel and Cavallo; Cavallo: trade openness makes countries less vulnerable to financial crises; controlling for endogeneity strengthens this effect.
    - Quantified effect: a 10 percentage point increase in trade openness reduces the probability of a sudden stop by about 30 percent.

### Empirical research priorities and open questions
- Measurement improvements:
  - Greater use of de facto measures (stock-based) and micro data to identify channels.
  - Align measures with theoretical notions of integration.
- Collateral benefits:
  - Expand empirical work on indirect benefits, especially links between open capital accounts and governance (public and corporate).
- Productivity and TFP:
  - Robust investigation of whether and how financial integration raises TFP growth.
- Threshold analysis:
  - Develop composite threshold measures to assess country readiness for capital account liberalization.
  - More detailed analysis of relative importance and tradeoffs among threshold conditions.
- Micro and case studies:
  - Use industry- and firm-level data, event studies, and case studies to uncover channels and corroborate macro findings.

### Key empirical and data highlights (selected exact figures)
- Table 1. International Financial Integration: Gross Stocks of Foreign Assets and Liabilities (cross-country averages over five-year periods; sample: 21 industrial, 20 emerging market, 30 other developing)
  - All countries (billion U.S. dollars): 7,124 14,957 26,411 46,638 76,133
  - Share of FDI: 15.6 16.6 17.9 20.9 21.8
  - Share of equity: 4.9 7.5 9.5 15.7 15.9
  - Share of debt: 75.1 72.5 69.4 60.0 58.7
  - Share of other: 4.4 3.4 3.3 3.3 3.6
  - Advanced economies (billion U.S. dollars): 6,100 13,492 23,969 42,052 69,432
  - Emerging markets (billion U.S. dollars): 859 1,259 2,167 4,236 6,221
  - Other developing economies (billion U.S. dollars): 165 207 276 351 480
- Table 2. International Financial Integration: Gross Inflows (cross-country averages over five-year periods; sample as above)
  - All countries (billion U.S. dollars): 397 803 1,209 2,453 3,564
  - Share of FDI: 12.9 15.8 15.6 21.7 19.6
  - Share of equity: 3.9 7.7 9.4 12.2 12.0
  - Share of debt: 83.2 76.5 75.0 66.1 68.4
  - Advanced economies (billion U.S. dollars): 325 739 1,008 2,112 3,260
  - Emerging markets (billion U.S. dollars): 66 60 194 328 288
  - Other developing economies (billion U.S. dollars): 6 47 131 6
- Table 3. Volatility of Different Types of Inflows, 1985–2004
  - Standard deviation (All countries; Mean): FDI/GDP 1.90, Equity/GDP 1.42, Debt/GDP 4.42, FDI+Equity/GDP 2.78
  - Standard deviation (All countries; Median): FDI/GDP 1.52, Equity/GDP 0.71, Debt/GDP 3.15, FDI+Equity/GDP 1.75
  - Coefficient of variation (All countries; Mean): FDI/GDP 0.85, Equity/GDP 0.98, Debt/GDP 0.76, FDI+Equity/GDP 0.80
- Figure and sample notes:
  - De facto measures use Lane and Milesi-Ferretti (2006) dataset.
  - Sample of 71 countries: 21 advanced economies, 20 emerging market economies, 30 other developing economies.
  - Outliers excluded in Figures 5 and 6: United Kingdom (GBR), Netherlands (NLD), Belgium (BEL), Singapore (SGP), Switzerland (CHE), Ireland (IRL), Zambia (ZMB), China (CHN); inclusion did not change qualitative findings.

*Source: Executive Summary and Table of Contents of the document starting on page 4 (wp06189).*

### Executive Summary.......................................................................................................

### _wp06189 - Executive Summary

### I. Introduction
- Presents the scope and objectives of the paper (see section I).
- Located starting on page 7.

### II. A Brief Overview of Theory
- Subtopics:
  - A. Growth (section II.A) — page 10.
  - B. Volatility (section II.B) — page 10.
  - C. Comovement (section II.C) — page 11.

### III. Measuring Financial Openness
- Subtopics:
  - A. De Jure Measures Based on IMF Indicators (section III.A) — page 12.
  - B. Shortcomings of De Jure Measures (section III.B) — page 13.
  - C. De Facto Measures Based on Price Differentials (section III.C) — page 13.
  - D. De Facto Measures Based on Quantities (section III.D) — page 14.

### IV. Patterns of Financial Globalization
- Subtopics:
  - A. Evolution of Financial Globalization Across Different Country Groups (section IV.A) — page 15.
  - B. Composition of Stocks and Flows (section IV.B) — page 16.
  - C. Volatility of Inflows (section IV.C) — page 16.

### V. Macroeconomic Evidence on Effects of Financial Globalization
- Subtopics:
  - A. Effects on Growth (section V.A) — page 17.
  - B. Effects on Volatility (section V.B) — page 20.
  - C. Comovement (section V.C) — page 22.

### VI. How Does the Composition of Capital Flows Matter?
- Subtopics:
  - A. Portfolio Equity Flows (section VI.A) — page 23.
  - B. Foreign Direct Investment (FDI) (section VI.B) — page 27.
  - C. Debt Flows (section VI.C) — page 30.
  - D. Synthesis (section VI.D) — page 31.

### VII. Organizing Principles
- Subtopics:
  - A. Collateral Benefits (section VII.A) — page 33.
  - B. Thresholds (section VII.B) — page 34.
  - C. A Corollary: Collateral Benefits Enhance Productivity Growth (section VII.C) — page 36.
  - D. Summary (section VII.D) — page 37.

### VIII. Collateral Benefits of Financial Globalization
- Subtopics:
  - A. Financial Sector Development (section VIII.A) — page 38.
  - B. Institutional Quality and Governance (section VIII.B) — page 39.
  - C. Macroeconomic Policies (section VIII.C) — page 40.
  - D. Implications (section VIII.D) — page 42.

### IX. Threshold Effects in Outcomes of Financial Globalization
- Subtopics:
  - A. Interaction Between Financial Sector Development and Financial Integration (section IX.A) — page 43.
  - B. Role of Institutions and Governance in Driving Growth (section IX.B) — page 44.
  - C. Why Do Macroeconomic Policies Affect the Outcomes of Financial Integration? (section IX.C) — page 46.
  - D. Does the Level of Trade Openness Matter for the Effects of Financial Openness? (section IX.D) — page 49.
  - E. Threshold Effects and Composition of Inflows: A Summary (section IX.E) — page 50.

### X. Concluding Remarks
- Subtopics:
  - A. Main Findings (section X.A) — page 51.
  - B. Issues for Further Research (section X.B) — page 52.

### Tables (listed)
- 1. International Financial Integration: Gross Stocks of Foreign Assets and Liabilities — page 54.
- 2. International Financial Integration: Gross Inflows — page 55.
- 3. Volatility of Different Types of Inflows: 1985–2004 — page 56.
- 4A. Summary of Key Empirical Studies on Financial Integration and Growth — page 57.
- 4B. Summary of Key Empirical Studies on Equity Market Liberalization and Growth — page 61.
- 4C. Summary of Key Empirical Studies on FDI and Growth — page 62.

### Figures (listed)
- 1. Gross International Financial Assets and Liabilities: 1970–2004 — page 63.
- 2. Gross International Financial Liabilities of Developing Economies: 1970–2004 — page 64.
- 3. Evolution of International Financial Integration: 1970–2004 — page 65.
- 4. GDP (per capita, PPP weighted): 1970–2004 — page 66.
- 5A. Level of Financial Openness and GDP Growth, 1985–2004 — page 67.
- 5B. Change in Financial Openness and GDP Growth, 1985–2004 — page 67.
- 6A. Financial Openness and Financial Development: 1985–2004 — page 68.
- 6B. Financial Openness and Institutional Quality: 1985–2004 — page 68.
- 6C. Financial Openness and Macroeconomic Policies: 1985–2004 — page 69.

### Appendixes
- I: Capital Controls — page 70.
- II. Data Appendix — page 74.

*Source: Executive Summary and Table of Contents of the document starting on page 4.*

### EXECUTIVE SUMMARY

### _wp06189 - EXECUTIVE SUMMARY

### Principal conclusions
- Financial globalization can benefit developing countries, but with many nuances; extreme polemic claims on both sides are difficult to substantiate.
- Financial globalization by itself almost certainly does not lead to economic crises.
- The main benefits of financial globalization are often indirect and catalytic rather than direct capital-financing effects.
- There is a tension: financial globalization can catalyze collateral benefits that raise long-run growth, but premature opening without supporting conditions can delay these benefits and increase vulnerability to sudden stops.

### Conceptual framework and collateral benefits
- Traditional channels emphasized: more efficient international allocation of capital, capital deepening, international risk-sharing → GDP growth and lower consumption volatility.
- Alternative perspective: financial globalization can produce potential "collateral benefits" that operate indirectly and may be more important for raising GDP/TFP growth and reducing consumption volatility:
  - Financial market development
  - Institutional development and better governance
  - Macroeconomic discipline
- Empirical implication: collateral benefits take time to materialize and may be hard to detect in cross-country regressions that control for institutions, policies, and financial development, because these are the mechanisms through which openness operates.

### Thresholds and tensions
- Various threshold conditions shape macroeconomic outcomes of financial globalization (Figure B):
  - Financial market development
  - Institutional Quality, Governance
  - Macroeconomic policies
  - Trade integration
- Countries above thresholds: financial globalization more likely to improve GDP/TFP growth and reduce risks of crises.
- Countries below thresholds: premature liberalization can increase crisis risk and delay collateral benefits.
- Fundamental tension: many threshold conditions are themselves potential collateral benefits, creating bidirectional dynamics.

### Measurement of financial openness
- De jure measures: binary or finer indices based largely on IMF AREAER; examples include 0/1 measures, Quinn indices, Chinn and Ito principal components, Mody and Murshid measures.
- Shortcomings of de jure measures:
  - May reflect restrictions on foreign exchange transactions that do not impede capital flows.
  - Do not capture enforcement intensity.
  - May diverge from actual (de facto) integration; e.g., countries with strict de jure controls can have high de facto inflows.
- De facto measures:
  - Price-based measures face practical problems (risk and liquidity premia, thin markets).
  - Quantity-based measures preferred: gross stocks of foreign assets and liabilities (sum of gross assets and liabilities as ratio to GDP) are less volatile and meaningful for risk sharing.
  - Lane and Milesi-Ferretti dataset: stocks of gross liabilities and assets for 145 countries covering 1970–2004 used for de facto measures.

### Patterns of financial globalization (stylized facts)
- Surge in de facto financial globalization since mid-1980s; emerging markets account for the lion’s share of inflows to developing economies.
- Composition shifts:
  - Share of debt in gross stocks of foreign assets and liabilities fell from 75 percent in 1980–84 to 59 percent in 2000–2004.
  - Emerging markets: share of FDI and portfolio equity rose from 13 percent in 1980–84 to 37 percent in 2000–2004.
  - Industrial countries accounted for 91 percent and emerging markets for 8 percent of total outstanding foreign liabilities at end-2004.
- Flows: FDI and portfolio equity have become dominant for new flows into developing economies; debt still accounts for more than half the stock of all external liabilities.
- Volatility:
  - Gross inflows of debt financing are substantially more volatile than FDI or equity inflows (cross-country averages of standard deviations over 1985–2004).
  - Coefficients of variation give mixed results; some sensitivity to small-sample distortions.

### Macroeconomic evidence on effects
- Growth:
  - Majority of empirical cross-country studies do not find robust evidence that capital account liberalization alone increases growth.
  - Studies using de facto measures or finer de jure measures, micro data, longer samples, or interaction terms for supportive conditions tend to find more positive effects.
  - Cross-country regressions often show that once institutional, policy, and financial development variables are controlled for, the independent effect of openness diminishes.
  - Specific findings cited:
    - No systematic relationship between average de facto financial openness and growth during 1985–2004 once controls are included.
    - Weak positive association between change in financial openness (1985 to 2004) and average GDP growth, which vanishes after controlling for other determinants.
- Volatility and crises:
  - Little formal empirical evidence that capital account liberalization by itself caused the spate of crises in the last three decades.
  - Some studies (e.g., Glick, Guo, and Hutchison) find capital account openness reduces probability of currency crises after accounting for selection bias.
  - Banking crises account for about one-third of financial crises over the last three decades and tend to have larger output costs than currency crises; banking crises can predict future currency crises.
  - No systematic relationship between financial openness and output volatility in aggregate cross-country studies.
  - Kose, Prasad, and Terrones (2003b) find that for emerging markets, the ratio of consumption growth volatility to income growth volatility increased during the recent globalization period; relative consumption volatility increases with degree of financial openness up to a threshold, above which countries can achieve better consumption smoothing.
- Comovement:
  - Financial integration has been associated with increased synchronicity of business cycles and a greater role for global factors in fluctuations for industrial and some emerging economies.
  - Evidence is mixed on whether cross-country consumption correlations rose in the 1990s as theory predicts; some studies find consumption comovement did not increase on average in the 1990s for developing economies.

### How composition of capital flows matters
- Not all flows are equal; equity-like flows (FDI and portfolio equity) are presumed to:
  - Be more stable and less prone to reversals,
  - Carry collateral benefits (technology, management, governance improvements).
- Portfolio equity:
  - Macro evidence: several studies (Bekaert, Harvey, Lundblad; Li) find equity market liberalizations increase GDP growth:
    - Bekaert, Harvey, and Lundblad (BHL): sample of 95 countries, 1980–97 → equity liberalizations increase GDP growth by about 1 percentage point.
    - Li (2003): longer sample → 0.6 percentage point increase in GDP growth.
    - BHL sensitivity checks reduce magnitude but still find effects in range of 0.7–0.9 percentage points.
  - Micro evidence: industry- and firm-level studies find:
    - Post-liberalization industries more dependent on external finance grow faster (Gupta and Yuan; Hammel).
    - Firm-level increases in capital stock growth: Chari and Henry find post-liberalization capital stock growth exceeds pre-liberalization mean by an average of 5.4 percentage points in the three-year period following liberalization.
    - Mitton finds firms open to foreign investors register higher sales growth, investment, efficiency, and lower leverage.
    - Hammel and others support channels: lower cost of capital, higher investment, technology diffusion.
  - Caveat: macro results may capture coincident reforms; most measures are de jure.
- FDI:
  - Theory: FDI should be particularly beneficial via technology spillovers, managerial transfers, and stability.
  - Macro evidence: mixed; some studies find positive growth effects conditional on initial conditions (human capital, financial development, trade openness).
  - Carkovic and Levine (1960–1997 panel): after controlling for joint determination, no robust causal effect of FDI on growth; Melitz notes FDI’s effect may operate jointly with trade.
  - Micro evidence: horizontal spillovers mixed; vertical (backward/forward linkage) spillovers more robust:
    - Javorcik (Lithuania): 10 percent increase in foreign presence in downstream sectors → 0.38 percent increase in output of firms in supplying industry.
- Debt flows:
  - Debt flows (portfolio bonds, bank loans) generally viewed as riskiest:
    - Debt share in gross stocks fell from 75 percent (1980–84) to 59 percent (2000–2004), but debt remains significant.
    - Debt inflows are typically more volatile and procyclical.
    - High levels of short-term external debt in foreign currency increase crisis vulnerability; short-term debt/reserve ratios predict crises (Rodrik and Velasco).
    - Rodrik and Velasco: countries with larger short-term debt stock than reserves are three times more likely to experience sudden and massive reversals.
  - Arguments against blanket bans: short-term debt can be a liquidity device in low-quality investment environments (Diamond and Rajan); may serve as commitment device (Jeanne).

### Micro versus macro evidence and costs of capital controls
- Micro (firm/industry) studies often reveal efficiency costs of capital controls and benefits of openness that aggregate cross-country regressions mask.
- Evidence on costs of controls:
  - Capital controls cause distortions and evasion, reduce market discipline, and impose administrative costs.
  - Firm-level evidence (Desai, Foley, Hines): multinationals face about 5 percentage points higher interest rates under capital controls.
  - Capital controls reduce FDI and raise cost of capital at firm level.
- Joint analyses of flow types find:
  - FDI and portfolio equity tend to be associated with higher growth; portfolio bond flows and official flows less so.
  - Foreign bank lending may be negatively associated with growth unless local banks are well capitalized.

### Organizing principles for policy and research
- Collateral benefits perspective:
  - Financial opening can catalyze financial sector development, institutional improvements, governance, and macroeconomic discipline.
  - Because these operate indirectly and over time, short-run evidence may understate benefits.
  - Regression strategies that control for the channels of interest may mechanically remove the explanatory role of openness.
- Thresholds:
  - Supportive conditions (financial depth, institutions, macro policies, trade openness) matter for realizing benefits and limiting risks.
  - Policy implication: sequencing and pacing of liberalization should account for domestic readiness; yet openness itself can help foster readiness.
- Composition matters:
  - Policy should consider the composition of flows: encouraging FDI and equity investment may enhance collateral benefits, while being mindful of risks from short-term foreign-currency debt.
- Empirical research priorities:
  - Greater use of de facto measures (stock-based) and micro data to identify channels.
  - More work on interaction effects and thresholds to guide country-specific sequencing and design of liberalizations.

*Source: _wp06189 - EXECUTIVE SUMMARY*

### Box 1. Two Views of Impact of Financial Globalization on Developing Countries

### Box 1. Two Views of Impact of Financial Globalization on Developing Countries

### Traditional view: direct channels from financial globalization to growth and volatility
- Financial Globalization → More efficient international allocation of capital
- Direct channels emphasized:
  - Capital deepening
  - International risk-sharing
- Outcomes highlighted:
  - GDP growth
  - Reduction in consumption volatility

### A different perspective: financial globalization as catalyst for collateral benefits
- Core claim: financial globalization may serve as a catalyst for collateral benefits that raise GDP/total factor productivity (TFP) growth and reduce consumption volatility.
- Potential collateral benefits listed:
  - Financial market development
  - Institutional development
  - Better governance
  - Macroeconomic discipline
- The perspective acknowledges relevance of traditional channels but argues the catalytic role for collateral benefits "may be more important in increasing GDP/total factor productivity (TFP) growth and reducing consumption volatility."

### Thresholds and initial conditions
- Premature opening of the capital account "without having in place well-developed and well-supervised financial sectors, good institutions, and sound macroeconomic policies can hurt a country" by:
  - Making the structure of inflows unfavorable
  - Increasing vulnerability to sudden stops or reversals of flows
- Evidence indicates that the interaction between financial globalization and initial conditions determines growth and volatility outcomes.
- Operational sequencing note: "the process of globalization seems to proceed more smoothly when trade liberalization precedes financial integration."

### Interpretive balance and emphasis
- The authors do not dismiss the traditional direct channel: financial integration "may increase investment by relaxing the constraints imposed by low levels of domestic saving and by reducing the cost of capital."
- However, they state: "our view is that the importance of this direct channel by which financial integration influences growth may have been overemphasized in previous literature."
- They also acknowledge reverse causality possibility: "more foreign capital tends to flow to countries with better-developed financial markets and institutions."

*Source: Box 1, "Two Views of Impact of Financial Globalization on Developing Countries."*

### Box 2. But There Are Thresholds

### Box 2. But There Are Thresholds

### Thresholds and the tension between costs and benefits
- Financial globalization generates important collateral benefits but can greatly elevate the risks-to-benefits ratio if initial conditions in key dimensions are inadequate.
- Most (but not all) elements on the list of threshold conditions are identical to the list of collateral benefits, creating a deep tension: the same factors that financial integration can improve are often prerequisites for safely reaping its benefits.
- There is limited research on the relative importance of different thresholds and the trade-offs among threshold conditions; a usable composite threshold measure for readiness to liberalize the capital account is currently lacking.
- Schematic implication:
  - Above Thresholds → Financial globalization leads to better macroeconomic outcomes.
  - Below Thresholds → Financial globalization raises risks of crises.
- Policy implication: There is unlikely to be a uniform approach to opening the capital account that works for all countries; sequencing and country-specific priorities for collateral benefits matter.

### Collateral benefits and productivity (TFP) growth
- Collateral benefits identified (financial sector development, institutional quality, macroeconomic policies, trade integration) should enhance efficiency and, by extension, TFP growth.
- The view aligns with literature emphasizing TFP growth as the main driver of long-term growth, though the debate is not settled.
- Empirical status:
  - Little empirical work has directly investigated whether financial integration boosts TFP growth.
  - Edwards (2001a) finds some but not robust evidence that financial integration increases TFP growth.
  - Bonfiglioli (2006) and Kose, Prasad, and Terrones (2006b) provide preliminary evidence suggesting financial integration raises TFP growth.
  - Micro-level evidence on equity market liberalization and FDI shows capital inflows can generate efficiency gains at the firm level.
- Research priority: More work is needed on the hypothesis that financial integration raises TFP growth.

### Empirical evidence on collateral benefits (financial sector, institutions, macro policies)
- Observed correlations during 1985–2004:
  - Strong positive correlation between financial openness and measures of financial development and institutional quality.
  - Negative correlation between financial openness and log inflation.
  - Correlation with government budget deficit is essentially zero.
- Financial sector development
  - Theoretical channels: foreign bank participation can improve access to international markets, regulatory and supervisory frameworks, loan quality, introduce instruments/technology, increase competition, and act as a safety valve for depositors.
  - Empirical findings:
    - Foreign bank presence tends to raise competition and appears to lower bank overhead costs and profits.
    - Equity market liberalizations are associated with larger and more liquid stock markets (e.g., Levine and Zervos, 1998).
    - Chinn and Ito (2005): financial openness contributes to equity market development only after a moderate level of legal and institutional development is attained.
    - Bailliu (2000) and Klein and Olivei (2006) find higher domestic financial sector development in financially integrated economies.
- Institutional quality and governance
  - Corporate governance
    - Globalization can improve corporate governance by enabling better monitoring by foreign investors, transforming the market for corporate control, and reducing costs of governance investments.
    - Empirical evidence shows increased foreign competition tends to improve corporate governance; examples include cases documented in Cornelius and Kogut (2003) and Kim, Sung, and Wei (2006) for the Republic of Korea.
    - Listing in countries with stronger legal systems (e.g., the United States) can raise firm value by “renting” better public governance.
  - Public governance and corruption
    - Poor public governance discourages inward FDI (Wei, 2000a) and portfolio equity inflows (Gelos and Wei, 2005).
    - Country characteristics explain over seventy percent of variation in some measures of corporate governance, implying limited corporate governance improvement without better public governance.
    - Financial globalization can weaken incumbent opposition to reforms and facilitate financial sector development (Rajan and Zingales, 2003).
- Macroeconomic policies
  - Monetary and fiscal policies
    - Financial openness coincided with global disinflation trends; globalization may foster competition that reduces inflationary incentives (Rogoff, 2004).
    - Financial openness complicates monetary policy implementation in developing countries (Wagner, 2002; Hawkins, 2005).
    - Empirical evidence:
      - Tytell and Wei (2004): countries with higher financial openness are more likely to have better monetary outcomes in terms of lower inflation; no systematic relationship found between openness and better fiscal policies.
      - Garrett and Mitchell (1960–94 analysis) and Kim (2003) provide weak evidence that capital account openness may reduce government spending or fiscal deficits, but studies often use de jure measures and may not address endogeneity.
  - Exchange rate regime
    - Open capital accounts increase the burden on other policies and structural features if a country sustains a fixed exchange rate.
    - For economies with weak financial systems, the combination of an open capital account and a fixed exchange rate is particularly risky.
    - Some evidence indicates pegged regimes can confer lower inflation for developing countries with low exposure to international capital, but pegged or nearly pegged regimes are associated with a higher likelihood of financial crises for emerging markets.
    - Short-term strategy suggested by Wyplosz (2004): a soft peg or managed regime with well-designed limits on capital mobility for developing economies.
- Overall implication: Evidence consistently points to a catalytic role for international financial integration in financial sector and institutional development; evidence of a catalytic role in improving macroeconomic policies is present but weaker.

### Threshold effects: four interacting dimensions and empirical findings
- Four sets of structural and policy-related threshold features that interact with financial globalization to determine macroeconomic outcomes:
  1. Financial sector development
  2. Overall institutional quality
  3. Macroeconomic policy framework
  4. Trade integration
- A. Financial sector development and financial integration
  - Financial sector development amplifies growth benefits of FDI and equity flows and reduces vulnerability to crises; inadequate domestic liberalization has contributed to crises.
  - Empirical findings:
    - Hermes and Lensink (1970–95 sample): a threshold level of financial sector development is required to enjoy FDI growth benefits; most sub-Saharan African countries in their sample were below this threshold.
    - Alfaro, Chanda, Kalemli-Ozcan, and Sayek (2004) and Durham (2004): stronger growth impact of FDI when financial sectors are well developed.
    - Mishkin (2006) and Ishii et al. (2002): stronger financial systems helped avoid crises after liberalization; weak systems suffered crises.
- B. Institutions and governance
  - Institutional quality affects both de facto integration and the composition of inflows, influencing outcomes.
  - Empirical findings:
    - Klein (2005): non-monotonic interaction—capital account openness boosts growth for countries with better (but not the best) institutions; upper-middle-income countries benefit most.
    - Alfaro, Kalemli-Ozcan, and Volosovych (2006): institutional quality is the most important factor determining capital flows to developing countries.
    - Wei (2000c) and others: higher corruption reduces inward FDI substantially (comparable to raising corporate tax rates by large margins).
    - Faria and Mauro (2005): better institutional quality is associated with a higher share of equity-like liabilities in total external liabilities.
  - Composition effects:
    - Higher share of FDI in total inflows is negatively associated with probability of a currency crisis.
    - Better institutions tilt inflows toward FDI and portfolio equity (less crisis-prone composition); weaker property rights reduce FDI share whereas weaker financial development is associated with a higher FDI share.
    - Contrasting views (Hausmann and Fernandez-Arias; Albuquerque) highlight importance of distinguishing property rights institutions from financial institutions.
- C. Macroeconomic policies and outcomes of integration
  - Quality of fiscal, monetary, and exchange rate policies affects level/composition of inflows and vulnerability to crises.
  - Empirical findings:
    - Mody and Murshid (1979–99, 60 countries): financial flows have stronger impact on investment growth where macro policies are better.
    - Arteta, Eichengreen, and Wyplosz: positive growth effects of openness occur only when macroeconomic imbalances (e.g., black market premium) are eliminated.
    - Fixed exchange rates with open capital accounts often increase vulnerability to crises; flexible regimes or stringent preconditions for pegs are advised in many contexts.
- D. Trade openness interacts with financial openness
  - Trade integration reduces the probability of sudden stops and mitigates crisis costs; sequencing literature supports trade liberalization before financial integration.
  - Empirical findings:
    - Calvo, Izquierdo, and Mejia (2004), Frankel and Cavallo (2004), Cavallo (2005): trade openness makes countries less vulnerable to financial crises; controlling for endogeneity strengthens this effect.
    - Quantified effect: a 10 percentage point increase in trade openness reduces the probability of a sudden stop by about 30 percent.
  - Trade openness can help countries “export their way out” of recessions and cushion balance-sheet and default risks associated with large external adjustments.

### Summary and research priorities
- Conceptual summary:
  - Financial integration generates indirect (collateral) benefits that can boost growth; these indirect benefits may be more important than direct effects of external financing on investment.
  - Well-developed and efficient financial sectors, good institutions, and sound macroeconomic policies contribute to higher growth.
- Empirical status and priorities:
  - Evidence supports collateral roles in financial sector development and institutions; macroeconomic policy disciplining effects are weaker and more mixed.
  - The presence of threshold effects likely explains mixed macroeconomic evidence on growth from financial integration versus more positive microeconomic findings.
  - Important open research areas include:
    - Development of composite threshold measures to assess country readiness for capital account liberalization.
    - Robust empirical investigation of whether and how financial integration raises TFP growth.

*Source: _wp06189 - Box 2. But There Are Thresholds*

### references therein.

### _wp06189 - references therein

### Threshold Effects and Composition of Inflows: Synthesis
- Thresholds determine where on the continuum of potential costs and benefits a country ends up with financial globalization; no unified framework yet for their relative importance or tradeoffs.
- Key threshold dimensions highlighted:
  - Level of development of domestic financial markets.
  - Quality of institutions and corporate governance.
  - Nature of macroeconomic policies (including the exchange rate regime).
  - Extent of openness to trade.
- Empirical findings summarized:
  - Arteta, Eichengreen, and Wyplosz (2003) find no evidence that liberalization is counterproductive in financially underdeveloped countries, but confirm threshold effects for positive growth effects of openness.
  - Evidence on the importance of threshold effects is mixed (Edison, Levine, Ricci, and Sløk (2004) unable to show larger growth impact in countries with more developed financial markets and better policies).
- Interaction with trade integration:
  - Trade integration seems less risky than financial integration; empirical and theoretical work suggests liberalize trade in goods before financial assets.
  - Trade openness attenuates the negative growth effect of macro volatility and current account reversals (Edwards (2005): a decline in trade openness by roughly 30 percentage points increases the negative effect of a current account reversal on growth by approximately 1.2 percentage points).
- Volatility and openness:
  - Macroeconomic volatility negatively affects growth, but this relationship is attenuated for more open economies (Kose, Prasad, and Terrones, 2005, 2006a).
  - Collateral benefits (macroeconomic discipline, financial market development) from financial integration could also reduce volatility.

### Main Findings (Concluding Remarks)
- Measurement:
  - Distinction between de jure and de facto integration matters; de jure measures (legal/regulatory restrictions) are problematic due to heterogeneous implementation and enforcement.
  - De facto measures may be more relevant for analyzing direct and indirect benefits.
- Empirical evidence on growth:
  - Majority of cross-country empirical studies unable to find robust evidence that capital account liberalization per se increases growth.
  - Studies using de facto integration or finer de jure measures tend to find more positive results.
  - Little systematic evidence that capital account liberalization, by itself, increases vulnerability to financial crises.
- Composition matters:
  - Composition of capital inflows substantially influences growth benefits, though evidence is not decisive.
  - Equity market liberalizations: studies at macro and micro levels find positive effects on output growth.
  - FDI: consensus that FDI is likely most beneficial, but aggregate data detect benefits less clearly than equity; micro-data increasingly confirm positive effects on output and productivity through spillovers and vertical linkages.
- Collateral benefits:
  - Financial market development, better institutions and governance, and macroeconomic discipline are important indirect channels; these gains may be slow to appear and hard to detect in cross-country regressions.
- Transition risks:
  - Premature opening of the capital account in absence of supporting conditions can delay benefits and increase vulnerability to sudden stops.
  - Tension between short-term costs (e.g., crises) and long-term benefits may be difficult to avoid.

### Issues for Further Research (Priorities)
- Measurement improvements:
  - Extend research program on measuring financial openness, aligning measures with theoretical notions of integration.
  - Better understanding of channels through which different types of inflows affect growth dynamics.
- Collateral benefits:
  - Expand empirical work on indirect benefits, especially links between open capital accounts and governance (public and corporate); existing empirical literature sparse.
- Productivity and TFP:
  - Focus on effects of different types of flows on TFP growth, as per capita income growth depends on physical and human capital as well as TFP.
- Threshold analysis:
  - More detailed analysis of threshold effects—relative importance and tradeoffs among threshold conditions for countries contemplating capital account liberalization.
- Micro and case studies:
  - Use industry- and firm-level data, event studies, and case studies to uncover channels and corroborate macro-level findings.

### Key Empirical and Data Highlights (Selected Exact Figures)
- Table 1. International Financial Integration: Gross Stocks of Foreign Assets and Liabilities (in percent unless otherwise specified)
  - All countries (billion U.S. dollars): 7,124 14,957 26,411 46,638 76,133
  - Share of FDI: 15.6 16.6 17.9 20.9 21.8
  - Share of equity: 4.9 7.5 9.5 15.7 15.9
  - Share of debt: 75.1 72.5 69.4 60.0 58.7
  - Share of other: 4.4 3.4 3.3 3.3 3.6
  - Advanced economies (billion U.S. dollars): 6,100 13,492 23,969 42,052 69,432
  - Emerging markets (billion U.S. dollars): 859 1,259 2,167 4,236 6,221
  - Other developing economies (billion U.S. dollars): 165 207 276 351 480
  - Notes: Data are cross-country averages of annual data over five-year periods. Sample: 21 industrial, 20 emerging market, 30 other developing countries.
- Table 2. International Financial Integration: Gross Inflows (in percent unless otherwise specified)
  - All countries (billion U.S. dollars): 397 803 1,209 2,453 3,564
  - Share of FDI: 12.9 15.8 15.6 21.7 19.6
  - Share of equity: 3.9 7.7 9.4 12.2 12.0
  - Share of debt: 83.2 76.5 75.0 66.1 68.4
  - Advanced economies (billion U.S. dollars): 325 739 1,008 2,112 3,260
  - Emerging markets (billion U.S. dollars): 66 60 194 328 288
  - Other developing economies (billion U.S. dollars): 6 47 131 6
  - Notes: Data are cross-country averages of annual data over five-year periods. Sample comprises 21 industrial, 20 emerging market, and 30 other developing countries.
- Table 3. Volatility of Different Types of Inflows, 1985–2004 (Standard deviation and Coefficients of variation: means and medians)
  - Standard deviation (All countries; Mean): FDI/GDP 1.90, Equity/GDP 1.42, Debt/GDP 4.42, FDI+Equity/GDP 2.78
  - Standard deviation (All countries; Median): FDI/GDP 1.52, Equity/GDP 0.71, Debt/GDP 3.15, FDI+Equity/GDP 1.75
  - Coefficient of variation (All countries; Mean): FDI/GDP 0.85, Equity/GDP 0.98, Debt/GDP 0.76, FDI+Equity/GDP 0.80
- Table 4A–4C. Empirical literature synthesis (selected stylized conclusions)
  - Cross-country studies: mixed results—NO EFFECT / MIXED / POSITIVE depending on sample, methodology, and measures of openness.
  - Equity liberalization studies (Table 4B): predominantly POSITIVE effects on growth or investment (e.g., Henry (2000); Bekaert, Harvey and Lundblad (2001, 2005); Li (2003)).
  - FDI studies (Table 4C): MIXED results; positive effects often conditional on host-country characteristics (financial development, human capital, sectoral composition).
- Figure and sample notes:
  - Evolution charts and scatterplots use Lane and Milesi-Ferretti (2006) dataset for de facto measures.
  - Sample of 71 countries divided into: 21 advanced economies, 20 emerging market economies, and 30 other developing economies (listed in Appendix II).
  - Outliers excluded in Figures 5 and 6 for presentation: United Kingdom (GBR), Netherlands (NLD), Belgium (BEL), Singapore (SGP), Switzerland (CHE), Ireland (IRL), Zambia (ZMB), China (CHN); inclusion did not change qualitative findings.

### Appendices: Capital Controls and Data Notes (Selected Exact Details)
- Capital controls classification:
  - Direct (administrative) controls: prohibitions, explicit volume limits, approval procedures.
  - Indirect (market-based) controls: dual/multiple exchange rates, explicit/implicit taxes on cross-border flows.
- AREAER-based measurement:
  - AREAER summary table categories (post-1996) include exchange rate arrangements; exchange rate structure; arrangements for payments and receipts; resident/nonresident accounts; imports and import payments/Exports and export proceeds; payments for (proceeds from) invisible transactions and current transfers.
  - AREAER capital account categories (13): Capital market securities; Money market instruments; Collective investment securities; Derivatives and other instruments; Commercial credits; Financial credits; Guarantees, sureties, and financial backup facilities; Direct investment; Liquidation of direct investment; Real estate transactions; Personal capital transactions; Provisions specific to commercial banks and other credit institutions; Provisions specific to institutional investors.
  - Pre-1996 AREAER summary table covered six categories: Restrictions on payments on capital account transactions; Restrictions on payments for current account transactions; Bilateral payments arrangements with members and nonmembers; Import surcharges; Advance import deposits; Surrender/repatriation requirements for export proceeds.
- Prudential measures:
  - Some prudential measures (reserve and deposit requirements, maturity restrictions, reporting requirements, limits on use of derivatives) can functionally restrict capital flows and complicate de jure measurement.

_Source: _wp06189 - references therein (PDF)._

### References

### _wp06189 - References

### Capital-account liberalization, capital controls, and financial openness
- Aghion, Philippe, Philippe Bacchetta, Romain Rancière, and Kenneth Rogoff, 2006, “Exchange Rate Volatility and Productivity Growth: The Role of Financial Development,” NBER Working Paper No. 12117.
- Aitken, Brian J., and Ann E. Harrison, 1999, “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela,” American Economic Review, Vol. 89, No. 3 (June), pp. 605–18.
- Ariyoshi, Akira, Karl Friedrich Habermeier, Andrei Ki, Jorge Iván Canales Kriljenko, and Inci Ötker, 2000, “Capital Controls: Country Experiences with Their Use and Liberalization,” IMF Occasional Paper No. 190.
- Arteta, Carlos, Barry Eichengreen, and Charles Wyplosz, 2003, “When Does Capital Account Liberalization Help More than It Hurts?” in Economic Policy in the International Economy: Essays in Honor of Assaf Razin.
- Bacillus: (See Grilli and Milesi-Ferretti, 1995) Grilli, Vittorio, and Gian Maria Milesi-Ferretti, 1995, “Economic Effects and Structural Determinants of Capital Controls,” Staff Papers, Vol. 42, No. 3 (September), pp. 517–51.
- Bekaert, Geert, Campbell R. Harvey, and Christian Lundblad — multiple works on financial liberalization, emerging equity markets, and growth (2000, 2001, 2005, 2006).
- Edwards, Sebastian, 2001, 2004, 2005, 2006 — multiple NBER and working papers on capital mobility, financial openness, sudden stops, and output losses.
- Eichengreen, Barry, 2000, 2001, 2005 — studies on taming capital flows and cross-country evidence on capital account liberalization.
- Miniane, Jacques, 2004, “A New Set of Measures on Capital Account Restrictions,” Staff Papers, Vol. 51, No. 2, pp. 276–308.
- Mishkin, Frederic S., 2006, The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich, forthcoming.
- Tytell, Irina, and Shang-Jin Wei, 2004, “Does Financial Globalization Induce Better Macroeconomic Policies?” IMF Working Paper 04/84.

### Foreign direct investment (FDI), multinational firms, and linkages to growth
- Aitken, Brian J., and Ann E. Harrison, 1999, “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela,” American Economic Review, Vol. 89, No. 3 (June), pp. 605–18.
- Alfaro, Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek, 2004, “FDI and Economic Growth: The Role of Local Financial Markets,” Journal of International Economics, Vol. 64, No. 1 (October), pp. 89–112.
- Alfaro, Laura, and Andrés Rodríguez-Clare, 2004, “Multinationals and Linkages: An Empirical Investigation,” Economía, Vol. 4, No. 2 (Spring), pp. 113–70.
- Borensztein, Eduardo, José De Gregorio, and Jong-Wha Lee, 1998, “How Does Foreign Direct Investment Affect Growth?” Journal of International Economics, Vol. 45 (June), pp. 115–35.
- Djankov, Simeon, and Bernard Hoekman, 2000, “Foreign Investment and Productivity Growth in Czech Enterprises,” World Bank Economic Review, Vol. 14, No. 1 (January), pp. 49–64.
- Goldberg, Linda, 2004, “Financial-Sector Foreign Direct Investment and Host Countries: New and Old Lessons,” NBER Working Paper No. 10441.
- Javorcik, Beata S., 2004, “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages,” American Economic Review, Vol. 94, No. 3 (June), pp. 605–27.
- Keller, Wolfgang, and Stephen R. Yeaple, 2003, “Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States,” NBER Working Paper No. 9504.
- Moran, Theodore H., ed., 2005, Does Foreign Direct Investment Promote Development? (and chapters therein).
- Smarzynska, Beata K., and Shang-Jin Wei, 2000, “Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence,” NBER Working Paper No. 7969 (October).

### Financial globalization, integration, and macroeconomic volatility
- Aizenman, Joshua, and Brian Pinto, eds., 2006, Managing Economic Volatility and Crisis (Cambridge, MA: Cambridge University Press).
- Beck, Thorsten, Mattias Lundberg, and Giovanni Majnoni, 2001, “Financial Intermediary Development and Growth Volatility: Do Intermediaries Dampen or Magnify Shocks?” World Bank Policy Research Working Paper No. 2707.
- Bussiere, Matthieu, and Marcel Fratzscher, 2004, “Financial Openness and Growth: Short-Run Gain, Long-Run Pain?” ECB Working Paper No. 348.
- Caballero, Ricardo J., and Arvind Krishnamurthy, 2001, “International and Domestic Collateral Constraints in a Model of Emerging Market Crises,” Journal of Monetary Economics, Vol. 48, No. 3 (December), pp. 513–48.
- Calvo, Guillermo, Alejandro Izquierdo, and Luis-Fernando Mejía, 2004, “On the Empirics of Sudden Stops: the Relevance of Balance-sheet Effects,” proceedings, Federal Reserve Bank of San Francisco.
- Demirgüç-Kunt, Asli, and Enrica Detragiache, 1999, “Financial Liberalization and Financial Fragility,” in Annual World Bank Conference on Development Economics 1998.
- Eichengreen, Barry; Kose, M. Ayhan; Prasad, Eswar S.; and many IMF staff authors — multiple works examining financial integration, volatility, comovement, and policy implications (see Edison et al. 2002, 2004; Kose et al. 2003a, 2003b, 2004, 2005, 2006a, 2006b).
- Imbs, Jean, 2006, “The Real Effects of Financial Integration,” Journal of International Economics, Vol. 68, No. 2 (March), pp. 296–324.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2001–2006 — series on external wealth, international financial integration, and financial globalization (Journal of International Economics, Staff Papers, IMF Working Paper 06/69).
- Levchenko, Andrei A., 2005, “Financial Liberalization and Consumption Volatility in Developing Countries,” IMF Staff Papers, Vol. 52, No. 2.
- Schmukler, Sergio L., 2004, “Financial Globalization: Gain and Pain for Developing Countries,” Federal Reserve Bank of Atlanta Economic Review, Second Quarter, pp. 39–66.
- Stulz, René, 2005, “The Limits of Financial Globalization,” Journal of Finance, Vol. 60, No. 4 (August), pp. 1595–1637.

### Exchange rates, currency crises, sudden stops, and balance-sheet effects
- Calvo, Guillermo, Alejandro Izquierdo, and Ernesto Talvi, 2006, “Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises,” NBER Working Paper No. 12101.
- Calvo, Guillermo, and Ernesto Talvi, 2005, “Sudden Stop, Financial Factors, and Economic Collapse in Latin America: Learning from Argentina and Chile,” NBER Working Paper No. 11153.
- Frankel, Jeffrey, and Andrew K. Rose, 1996, “Currency Crashes in Emerging Markets: An Empirical Treatment,” Journal of International Economics, Vol. 41, No. 3–4 (November), pp. 351–66.
- Glick, Reuven, and Michael Hutchison, 2001, “Banking and Currency Crises: How Common Are Twins?” in Financial Crises in Emerging Markets.
- Guidotti, Pablo E., Federico Sturzenegger, and Agustín Villar, 2004, “On the Consequences of Sudden Stops,” Economía, Vol. 4 (Spring), pp. 171–214.
- Jeanne, Olivier, 2003, “Why Do Emerging Economies Borrow in Foreign Currency?” IMF Working Paper No. 03/177.
- Obstfeld, Maurice, and Kenneth Rogoff, 2004, Foundations of International Macroeconomics (Cambridge, MA: MIT Press).
- Reinhart, Carmen M., and Kenneth Rogoff, 2004, “The Modern History of Exchange Rate Arrangements: A Reinterpretation,” The Quarterly Journal of Economics, Vol. 119 (February), pp. 1–48.
- Rodrik, Dani, and Andres Velasco, 2000, “Short-Term Capital Flows,” Annual World Bank Conference on Development Economics 1999, pp. 59–90.

### Trade openness, globalization, and growth linkages
- Baldwin, Robert E., 2004, “Openness and Growth: What’s the Empirical Relationship?” in Challenges to Globalization.
- Frankel, Jeffrey, and David Romer, 1999, “Does Trade Cause Growth?” American Economic Review, Vol. 89, No. 3 (June), pp. 379–99.
- Winters, L. Alan, 2004, “Trade Liberalization and Economic Performance: An Overview,” Economic Journal, Vol. 114, No. 493 (February), pp. F4–F21.
- Kose, M. Ayhan, Eswar S. Prasad, and Marco E. Terrones, 2003a, “How Does Globalization Affect the Synchronization of Business Cycles?” American Economic Review, Vol. 93, No. 2, pp. 57–63.
- Frankel, Jeffrey, and Eduardo A. Cavallo, 2004, “Does Openness to Trade Make Countries More Vulnerable to Sudden Stops or Less? Using Gravity to Establish Causality,” NBER Working Paper No. 10957.

### Institutions, governance, corruption, and development
- Acemoglu, Daron, Simon Johnson, and James A. Robinson, 2001, “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review, Vol. 91, pp. 1369–401.
- Acemoglu, Daron, and Yunyong Tchaicharoen, 2003, “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises, and Growth,” Journal of Monetary Economics, Vol. 50, No. 1 (January), pp. 49–123.
- Dollar, David & Kraay, Aart, 2003, "Institutions, Trade, and Growth," Journal of Monetary Economics, Vol. 50, No. 1 (January), pp. 133–62.
- Glaeser, Edward L., Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, NBER Working Paper No. 10568, “Do Institutions Cause Growth?”
- Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi, 2003, “Governance Matters III: Governance Indicators for 1996–2002,“ World Bank Policy Research Working Paper No. 3106.
- Wei, Shang-Jin, 2000a,b,c and subsequent works on corruption, crony capitalism, and capital flows.

### Industry, firm-level evidence, and productivity
- Aghion, Daron, and Fabrizio Zilibotti, 1997, “Was Prometheus Unbound by Chance? Risk, Diversification, and Growth,” Journal of Political Economy, Vol. 105, No. 4 (August), pp. 709–51.
- Haskell, Jonathan E., Sonia C. Pereira, and Matthew J. Slaughter, 2002, “Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?” NBER Working Paper No. 8724.
- Harrison, Anne, Inessa Love, and Margaret McMillan, 2004, “Global Capital Flows and Financing Constraints,” Journal of Development Economics, Vol. 75, No. 1 (October), pp. 269–301.
- Vanassche, Ellen, 2004, “The Impact of International Financial Integration on Industry Growth,” manuscript.
- Vlachos, Jonas, and Daniel Waldenström, 2005, “International Financial Liberalization and Industry Growth,” International Journal of Finance and Economics, Vol.10, No.3, pp. 263–84.

### Business cycles, volatility, and welfare costs
- Barlevy, Gadi, 2004, “The Cost of Business Cycles under Endogenous Growth,” American Economic Review, Vol. 94, issue 4, pages 964–990.
- Blankenau, William F., Ayhan Kose, and Kei-Mu Yi, 2001, “Can Real World Interest Rates Explain Business Cycles in Small Open Economies?” Journal of Economic Dynamics and Control, Vol. 25, pp. 867–89.
- Easterly, William, Roumeen Islam, and Joseph E. Stiglitz, 2001, “Shaken and Stirred: Explaining Growth Volatility,” Annual World Bank Conference on Development Economics.
- Kaminsky, Graciela, and Carmen M. Reinhart, 1999, “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,” American Economic Review, Vol. 89, No. 3 (June), pp. 473–500.
- Ramey, Garey, and Valerie A. Ramey, 1995, “Cross-Country Evidence on the Link Between Volatility and Growth,” American Economic Review, Vol. 85, No. 5, pp. 1138–51.
- Pagan: (See Kose et al.) Kose, M. Ayhan, Christopher Otrok, and Charles Whiteman, 2005, “Understanding the Evolution of World Business Cycles,” IMF Working Paper No. 05/211.

### Methodology, measures, and data on integration
- Edison, Hali J., Ross Levine, Luca Ricci, and Torsten Sløk, 2002, “International Financial Integration and Economic Growth,” Journal of International Monetary and Finance, Vol. 21, No. 6 (November), pp. 749–76.
- Miniane, Jacques, 2004, “A New Set of Measures on Capital Account Restrictions,” Staff Papers, Vol. 51, No. 2, pp. 276–308.
- Lane, Philip R., and Gian Maria Milesi-Ferretti, 2006, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” IMF Working Paper 06/69.
- Berg, Andrew, Eduardo Borensztein, and Catherine Pattillo, 2004, “Assessing Early Warning Systems: How Have They Worked in Practice?” IMF Working Paper 04/52.

*References list compiled from the PDF "_wp06189 - References".*

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