Effects of Financial Globalization on Developing Countries: Some Empirical Evidence
Occasional Papers, September 3, 2003
Source details
- Canonical URL
- Effects of Financial Globalization on Developing Countries: Some Empirical Evidence
Other formats
Bibliographic details
- Authors: Ayhan Kose, Kenneth Rogoff, Eswar S Prasad, Shang-Jin Wei
- Published: September 3, 2003
- Series: Occasional Papers
- DOI: https://doi.org/10.5089/9781589062214.084
Summary
- This study provides a candid, systematic, and critical review of recent evidence on the effects of financial globalization on developing countries.
- Based on a review of the literature and some new empirical evidence, the study reaches three principal conclusions (see Findings below).
- Some recent evidence highlighted in the study suggests that sound macroeconomic frameworks and, in particular, good governance are both quantitatively and qualitatively important in shaping developing countries’ experiences with financial globalization.
Key findings
- It is difficult to detect a strong and robust causal relationship between financial integration and economic growth, despite an apparently strong theoretical presumption.
- Contrary to theoretical predictions, financial integration appears to be associated with increases in consumption volatility (both in absolute terms and relative to income volatility) in many developing countries.
- There appear to be threshold effects in both the growth and consumption-volatility relationships, which may be related to absorptive capacity.
Implications for policy and interpretation
- The presence of threshold effects implies that the benefits and costs of financial globalization may depend on country-specific characteristics such as absorptive capacity.
- Sound macroeconomic frameworks and good governance matter both quantitatively and qualitatively for how developing countries experience financial globalization.
- Policymakers should consider the potential for increased consumption volatility associated with financial integration and assess whether institutional and macroeconomic conditions are adequate to manage such volatility.