Financial Globalization and Economic Policies

Columbia University
Handbook of Development Economics 03/2009; DOI: 10.2139/ssrn.1392949
Source: RePEc

ABSTRACT We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable tensions inherent in evaluating the risks and benefits associated with financial globalization. In light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but as part of a broader package of reforms and supportive macroeconomic policies.

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    ABSTRACT: The impact of multinational activity on host-country productivity has been a major topic of economic research. A positive impact can be attributed to knowledge spillovers from foreign multinational to domestic …rms or a less stressed, alternative explanation— …rm selections— whereby competition from multinational …rms leads to market reallocations and allows only the most productive domestic …rms to survive. We develop a theoretical and structural empirical framework to distinguish the two e¤ects and show that even though both knowledge spillovers and selections predict a positive relationship between multinational activity and aggregate productivity, the e¤ects bear distinct pre-dictions for the distributions of domestic …rms. Knowledge spillovers induce a rightward shift of the productivity distribution; the selection e¤ect, in con-trast, causes a weaker, or even leftward, shift of the revenue distribution and an increase in the cuto¤ productivity and revenue. Using a large cross-country panel dataset of manufacturing …rms, we …nd signi…cant evidence of selec-tions, market reallocations as well as knowledge spillovers. We also quantify the productivity gains associated with each e¤ect and explore cross-country heterogeneity.
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