Financial Globalization and Economic Policies

Columbia University
Handbook of Development Economics 03/2009; 5. DOI: 10.2139/ssrn.1392949
Source: RePEc


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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Available from: Shang-Jin Wei
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    • "Regarding financial globalization, Kose et al. (2009b) argue in favour of quantity-based, de facto measures and the early literature had used mostly de jure measures, such as those based on the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). However, such measures do not fully capture the degree of enforcement and effectiveness of capital controls as well as regulations in other fields that affect capital flows. "
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    ABSTRACT: This paper examines the long-run relationship between financial globalization and economic growth in sub-Saharan Africa using panel unit root tests, panel cointegration tests and panel multivariate ECM. The study finds that the variables are stationary at first difference — I(1). Also, the results reveal that all the variables are cointegrated, that is, they are related in the long run. The results of the ECT test within the framework of panel multivariate ECM confirm the cointegration tests. The paper concludes that there is a long-run relationship between financial globalization and economic growth in sub-Saharan Africa. The paper argues that sub-Saharan African economies will benefit from the era of financial globalization in the long run in as much as the governments promote and encourage sound macroeconomic policies and strong institutions.
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    • "Nevertheless , Spratt (2009) is one of the few recent publications that provides a good overview of the current issues in development finance. Kose et al. (2010) is also helpful in understanding issues associated with financial globalization. Another source of input for this paper is the data sets and publications made available by international organizations due to their coverage of empirical and policy aspects. "

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    • "inancial sector, impose discipline on macroeconomic policies, generate efficiency gains among domestic firms by exposing them to competition from foreign entrants, and unleash forces that result in better government and corporate governance. These collateral benefits could enhance efficiency and, by extension, total factor productivity growth (see Kose et. al, 2010)."
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    ABSTRACT: This paper provides a brief analysis of three major questions raised in the context of the recent global financial crisis. First, how similar is the crisis to previous episodes? We argue that the crisis featured some close similarities to earlier ones, including the presence of credit and asset price booms fueled by rapid debt accumulation. Second, how different is it from earlier episodes? We show that, as much as it displayed some similarities with previous cases, it also featured some significant differences, such as the explosion of opaque and complex financial instruments in a context of highly integrated global financial markets. Third, how costly are recessions that followed these types of crises? Although the latest episode took a very heavy toll on the real economy, we argue that this was not a surprising outcome. In particular, historical comparisons indicate that recessions associated with periods of deep financial disruptions result in much larger declines in real economic activity. We discuss the implications of these findings for economic and financial sector policies and future research.
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