Reaping the Benefits of Financial Globalization

Occasional Papers, December 16, 2008

Source details

Authors: Giovanni Dell'Ariccia, Paolo Mauro, Andre Faria, Jonathan David Ostry, Julian Di Giovanni, Martin Schindler, Ayhan Kose, Marco Terrones
Published: December 16, 2008
Series: Occasional Papers
DOI: https://doi.org/10.5089/9781589067486.084

Financial globalization has increased dramatically over the past three decades, particularly for advanced economies, while emerging market and developing countries experienced more moderate increases.
Divergences across countries stem from different capital control regimes, and factors such as institutional quality and domestic financial development.
Although, in principle, financial globalization should enhance international risk sharing, reduce macroeconomic volatility, and foster economic growth, in practice its effects are less clear-cut.
The paper envisages a gradual and orderly sequencing of external financial liberalization and complementary reforms in macroeconomic policy framework as essential components of a successful liberalization strategy.

Trends and scope:
- Financial globalization rose markedly over the past three decades, with advanced economies experiencing the largest increases.
- Emerging market and developing countries showed more moderate increases in financial globalization.
Sources of cross-country divergence:
- Differences in capital control regimes.
- Variations in institutional quality.
- Differences in domestic financial development.
Outcomes and limitations:
- Theoretical benefits include enhanced international risk sharing, reduced macroeconomic volatility, and fostered economic growth.
- Empirical effects are less clear-cut than theory suggests.

Adopt a gradual and orderly sequencing of external financial liberalization.
Implement complementary reforms in the macroeconomic policy framework alongside liberalization.
Treat sequencing and complementary reforms as essential components of a successful liberalization strategy.