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Financial integration and banking crisis. A critical analysis of restrictions on capital flows

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  • John Nkwoma Inekwe
  • Maria Rebecca Valenzuela

Abstract

We investigate the effect of financial integration on a banking crisis. In contrast to existing works, we allow for capital restrictions while studying the impact of financial integration on a banking crisis. Using firm‐level lending and borrowing information in the global market of syndicated loans; we generate aggregate measures of financial integration and examine how countries with capital flow restrictions thrive in the wake of a banking crisis. We concentrate on basic network measures of integration for a panel of 62 countries that allow for capital restriction at any time within the sample period. Financial integration increases the incidence of a banking crisis, and capital restrictions worsen a banking crisis. However, capital restrictions reduce the negative impact of financial integration on the incidence of a banking crisis. Thus, financial integration becomes beneficial when countries allow for some forms of capital control.

Suggested Citation

  • John Nkwoma Inekwe & Maria Rebecca Valenzuela, 2020. "Financial integration and banking crisis. A critical analysis of restrictions on capital flows," The World Economy, Wiley Blackwell, vol. 43(2), pages 506-527, February.
    • Handle: RePEc:bla:worlde:v:43:y:2020:i:2:p:506-527
    DOI: 10.1111/twec.12855
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    Cited by:

    1. Inekwe, John Nkwoma, 2020. "Liquidity connectedness and output synchronisation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 66(C).
    2. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2020. "Credit risk and financial integration: An application of network analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).
    3. Fatma Tasdemir, 2023. "Financial Globalization and Growth: The Impacts of Financial Development and Governance," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 9(1), pages 99-111, June.
    4. Wahyu Jatmiko & M. Shahid Ebrahim & Abdullah Iqbal & Rafal M. Wojakowski, 2023. "Can trade credit rejuvenate Islamic banking?," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 111-146, January.

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