Financial Globalization: A Reappraisal

IMF Working Papers, August 1, 2006

Source details

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels and with a variety of apparently conflicting results.
The paper attempts to provide a unified conceptual framework for organizing this vast and growing literature.
The framework is used to provide a synthetic perspective on the macroeconomic effects of financial globalization, in terms of both growth and volatility.
Overall conclusion: the recent empirical literature lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances; there is little systematic evidence to support widely cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises.

There is still little robust evidence of the growth benefits of broad capital account liberalization.
A number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth.
Microeconomic (firm- or industry-level) evidence shows some benefits of financial integration and the distortionary effects of capital controls.
Macroeconomic evidence on benefits and costs remains inconclusive.
The literature contains disparate channels and apparently conflicting results, necessitating a unified conceptual framework for interpretation.

Provides a unified conceptual framework to organize empirical findings across microeconomic and macroeconomic studies.
Uses the framework to synthesize evidence on both growth effects and volatility implications of financial globalization.

Developing countries can benefit from financial globalization, but benefits are qualified and context-dependent.
Claims that financial globalization by itself leads to deeper and more costly developing country growth crises lack systematic empirical support.
Micro-level distortions from capital controls are documented, suggesting trade-offs policymakers should consider when designing capital account policies.
Equity market liberalizations may have different growth implications than broad capital account liberalizations; policy design should distinguish across types of financial integration.

_wp06189 - Executive Summary
- _wp06189 - Executive Summary (Markdown version)
- _wp06189 - Executive Summary (PDF)