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Is a more financially open world riskier?

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  • Stolbov, Mikhail

Abstract

The paper studies co-movement and causality between global financial openness and nearly all known types of financial crises during 1970–2014. It builds on a composite measure of global financial openness, which synthesizes three well-established indicators (de-jure, de-facto capital account openness and the KOF economic globalization index). I use linear and nonparametric Granger (no) causality tests as well as wavelet-based techniques to characterize the dynamic dependence, which appears rather weak. Only in case of systemic and triple crises, this dependence is found more robust. I offer two explanations for the elusive openness-crisis nexus. First, the impact of global financial openness on the frequency of crises can be indirect, transmitted through global macro-fundamentals (world real GDP growth rates, global inflation and commodity prices). Second, capital account liberalization can be self-reinforcing. Despite an increased risk of crises, countries, which have partly implemented such reforms, are likely to proceed. In doing so, they are often guided by their peers in a regional integration agreement. Overall, the findings of the paper question the widespread assertion that increasing global financial openness undermines financial stability.

Suggested Citation

  • Stolbov, Mikhail, 2019. "Is a more financially open world riskier?," International Economics, Elsevier, vol. 157(C), pages 99-116.
    • Handle: RePEc:eee:inteco:v:157:y:2019:i:c:p:99-116
    DOI: 10.1016/j.inteco.2018.09.002
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    Keywords

    Capital account liberalization; Causality; Financial crises; Financial openness; Wavelets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • F30 - International Economics - - International Finance - - - General
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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