nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2006‒08‒26
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. International Capital Flows, Financial Stability and Growth By Graciela L. Kaminsky
  2. In search of FDI-led growth in developing countries By Dierk Herzer; Stephan Klasen; Felicitas Nowak-Lehmann D.
  3. How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility? By M. Ayhan Kose; Eswar S. Prasad; Marco E. Terrones

  1. By: Graciela L. Kaminsky
    Abstract: The explosion and dramatic reversal of capital flows to emerging markets in the 1990s have ignited a heated debate, with many arguing that globalization has gone too far and that international capital markets have become extremely erratic. In contrast, others have emphasized that globalization allows capital to move to its most attractive destination, fuelling higher growth. This paper re-examines the characteristics of international capital flows since 1970 and summarizes the findings of research of the 1990s on the behaviour of international investors as well as the short- and long-run effects of globalization on financial markets and growth.
    Keywords: international capital flows, globalization, mutual funds, stock market prices, financial liberalization.
    JEL: F30 F32 F33 F34 F36 G12 G15
    Date: 2005–12
  2. By: Dierk Herzer (Universität Frankfurt, Universität Göttingen); Stephan Klasen (Universität Göttingen); Felicitas Nowak-Lehmann D. (Universität Göttingen)
    Abstract: This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries FDI has no statistically significant long-run impact on growth. In very few cases, FDI indeed contributes to economic growth both in the long and the short run. But for some countries, there is also evidence of growth-limiting effects of FDI in the short or long term. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness, and the level of financial market development in developing countries.
    Keywords: FDI; Growth; Developing countries; Cointegration
    JEL: F43 C22
    Date: 2006–07–11
  3. By: M. Ayhan Kose (International Monetary Fund); Eswar S. Prasad (International Monetary Fund and IZA Bonn); Marco E. Terrones (International Monetary Fund)
    Abstract: The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom – that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization – a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. Using a comprehensive new dataset, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship. Specifically, we find that the estimated coefficient on the interaction between volatility and trade integration is significantly positive. We find a similar, although less significant, result for the interaction of financial integration with volatility.
    Keywords: globalization, international trade and financial linkages, macroeconomic volatility and growth
    JEL: F41 F36 F15
    Date: 2006–08

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