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Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization

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Author Info
Moritz Schularick ()
Thomas M. Steger () (Institute of Economic Research (WIF), Swiss Federal Institute of Technology Zurich (ETH))

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Abstract

Does international financial integration boost economic growth? The question has been discussed controversially for a long time, and a large number of studies has been devoted to its empirical investigation. As of yet, robust evidence for a positive impact of capital market integration on economic growth is lacking, as documented by Edison et al. (2002). However, there is substantial narrative evidence from economic history that highlights the contribution European capital made to economic growth of peripheral economies during the so-called first age of financial globalization before 1914. For this paper, we have compiled the first comprehensive data set to test econometrically if capital market integration had a positive impact on economic growth before WW1. Using the same models and techniques as contemporary studies, we show that there was indeed a significant and robust growth effect of international financial integration in the first era of financial globalization. Our temptative explanation for this marked difference between now and then stresses property rights protection as a prerequisite for the standard neoclassical model to work properly.

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Publisher Info
Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series Economics working paper series with number 06/46.

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Length: 22 pages
Date of creation: Jan 2006
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Handle: RePEc:eth:wpswif:06-46

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Related research
Keywords: International financial integration; Economic growth; First era of globalization.;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F30 - International Economics - - International Finance - - - General
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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    Other versions:
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  17. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    Other versions:
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