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on Financial Development and Growth |
| By: | Kose, M. Ayhan (International Monetary Fund); Prasad, Eswar (Cornell University); Terrones, Marco E. (International Monetary Fund) |
| Abstract: | Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. 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. |
| Keywords: | financial openness, capital account liberalization, capital flows, external assets and liabilities, foreign direct investment, portfolio equity, debt, total factor productivity |
| JEL: | F41 F36 F43 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3634&r=fdg |
| By: | Mark M. Spiegel |
| Abstract: | The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences. |
| Keywords: | Monetary policy ; Inflation (Finance) ; Globalization |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-10&r=fdg |