Financial Reforms, International Financial Flows, and Growth in Advanced Economies

This paper investigates the impact of financial liberalization, international capital flows, cross-border banking, as well as of monetary policy and equity prices on common economic growth. Since 1995, the largest part of real GDP growth in EU countries, Canada and the United-States has been driven by a common factor. Factor-augmented VAR estimates show that since the mid-1990s, equity prices have become by far the main driver of common growth. If common economic growth is positively related to equity prices, it has also become more vulnerable to stock markets’ downturns and more responsive to their upturns. Prior to 1995, the liberalization of domestic credit impacted negatively common economic growth and was the main source of volatility. The liberalization of capital flows and stock markets which was completed at about the same time, had an insignificant albeit negative impact on common economic growth. These results are robust to different VAR specifications. The impact of FDI and portfolio investment intensity on common growth has increased since the mid-1990s but empirical evidence on their relative importance is mitigated.