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Does Openness to International Financial Flows Raise Productivity Growth?

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  • Eswar Prasad
  • Marco Terrones
  • M. Ayhan Kose

Abstract

This paper provides a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries. We find that de jure capital account openness has a robust positive effect on TFP growth. The effect of de facto financial integration on TFP growth is less clear, but this masks an important and novel result. We find strong evidence that FDI and portfolio equity liabilities boost TFP growth while external debt is actually negatively correlated with TFP growth. The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/242.

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Length: 39
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/242

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Keywords: Capital account liberalization; Capital flows; Foreign direct investment; Debt; Production growth; Development; Economic models; capital account; capital account openness; economic growth; growth rate; growth accounting; total factor productivity; growth rates; gdp growth; capital accounts; open capital account; capital account restrictions; open capital accounts; business cycle; current account; real gdp; per capita income; national income; business cycle fluctuations; growth rate of output; capital formation; restrictions on capital account transactions; national income accounts; business cycle volatility; capital account transactions; current account balances; per capita income growth;

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