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International Financial Liberalisation and Economic Growth

  • Ben McLean

    (Reserve Bank of Australia)

  • Sona Shrestha

    (Reserve Bank of Australia)

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    This paper investigates the link between international financial integration and economic growth. In particular, we ask the following questions. What are the theoretical links between financial integration and growth? Is there any empirical evidence that an increase in financial integration is associated with higher economic growth at a cross-country level? Do different types of capital flows have different implications for growth? Existing empirical evidence suggests that the link between financial openness and economic growth is weak at best. While there is some evidence that financial liberalisation positively affects growth, this relationship is not robust. There is also some evidence that the positive impact of foreign investment on growth is conditional upon the existence of relatively developed domestic institutions and sound macroeconomic policy. This result is also not very robust and is sensitive to the measures employed to capture institutional development and the policy environment. To complement the existing research, we examine this issue with a particular emphasis on the composition of capital flows. Consistent with conventional wisdom, we find that both foreign direct investment and portfolio inflows enhance economic growth. By contrast, the effect of bank inflows is found to be mostly negative.

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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2002-03.

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    Date of creation: Jan 2002
    Date of revision:
    Handle: RePEc:rba:rbardp:rdp2002-03
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    1. Maurice Obstfeld, 1992. "Risk-taking, global diversification, and growth," Discussion Paper / Institute for Empirical Macroeconomics 61, Federal Reserve Bank of Minneapolis.
    2. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
    3. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    4. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
    5. Menzie Chinn & Michael Dooley, 1995. "Asia-Pacific Capital Markets: Measurement of Integration and the Implications for Economic Activity," NBER Working Papers 5280, National Bureau of Economic Research, Inc.
    6. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
    7. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
    8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
    9. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
    10. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
    11. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
    12. repec:tpr:qjecon:v:107:y:1992:i:2:p:407-37 is not listed on IDEAS
    13. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
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