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Effects of Financial Globalization on Developing Countries

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  • M. Ayhan Kose
  • Kenneth Rogoff
  • Eswar Prasad
  • Shang-Jin Wei

Abstract

This study provides a candid, systematic, and critical review of recent evidence on this complex subject. Based on a review of the literature and some new empirical evidence, it finds that (1) in spite of an apparently strong theoretical presumption, it is difficult to detect a strong and robust causal relationship between financial integration and economic growth; (2) 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; and (3) there appear to be threshold effects in both of these relationships, which may be related to absorptive capacity. Some recent evidence suggests that sound macroeconomic frameworks and, in particular, good governance are both quantitatively and qualitatively important in affecting developing countries’ experiences with financial globalization.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Occasional Papers with number 220.

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Length: 64
Date of creation: 03 Sep 2003
Date of revision:
Handle: RePEc:imf:imfocp:220

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Keywords: Developing countries; capital flows; financial integration; globalization; capital inflows; financial globalization; capital account liberalization; international financial; capital markets; international financial integration; international capital flows; international capital; private capital flows; stock market; private capital; capital controls; financial markets; capital mobility; fdi; global capital flows; capital outflows; international finance; international capital markets; capital market; foreign capital; cost of capital; foreign direct investment; direct investment; trade integration; global capital; access to international capital; private capital inflows; composition of capital inflows; capital account restrictions; volatility of capital flows; access to international capital markets; indexed bonds; capital accounts; international financial markets; volatility of capital inflows; global development finance; foreign capital flows; capital market liberalization; access to international financial markets; risk aversion; border capital flows; foreign assets; official flows; hedge funds; host country; global financial flows; capital inflow; speculative attacks; global financial markets; benefits of globalization; global financial integration; international financial contagion; international trade; capital stock; international financial statistics; capital-poor countries; capital account opening; international capital flow; capital account transactions; international integration; capital movements; foreign bank; liberalization of capital; capital flow; domestic capital; capital account crises; equity funds; capital asset pricing; host countries; foreign banks; international investors; stock market capitalization; capital asset pricing model; foreign investors; portfolio investment; foreign-owned firms; inward foreign direct investment; foreign investment; equity investment; external capital; domestic capital markets; international financial flows; world capital markets; capital crunch; global integration; capital asset; capital flow volatility; bond ratings; trade patterns; trade shocks; adverse external shocks; international financial architecture; international finance corporation; index bonds; capital flow reversals; global finance; global market; international financial institutions; capital market integration; volatile capital; equity risk premium; commodity trade; capital-rich countries; brady bonds; portfolio capital inflows; stock exchange; financial intermediation; measures of volatility; embracing globalization; cross-border financial flows; capital ratio; trade liberalization; openness to capital flows; equity prices; indexation; security markets; bond yields; capital accumulation; international financial regulation; short-term capital; net capital; trade barriers; equity returns; liberalization of capital accounts;

References

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