Analysis of the Previous Empirical Evidence The financial globalization - financial development nexus, has specially been approached in empirical studies. Particularly, based on the studies of Prasad et al. Some of these directly affect the determinants of economic growth augmentation of domestic savings, reduction in the cost of capital, transfer of technology from advanced to developing countries, and development of domestic financial sectors. Third, the risk of contagion presents a major threat to otherwise healthy countries, since international investors could withdraw capital from these countries for reasons unrelated to domestic factors. Also, financial development depends positively upon a series of control variables except the inflation rate. On the contrary, if external economic agentsare interested in collusion and cooperation with domestic interest groups, financial system will not be able to give all available information to all agents. Sections III and IV analyze the evidence on the effects of financial globalization on growth and volatility, respectively, in developing countries. The paper revisits the empirical literature on the implications of financial globalization for local market deepening, international risk diversification, financial contagion, and financial dollarization, and finds them to be rather limited. In this case, Latin American countries have a bigger variance, the mean is 1.
Monitor investments and exert corporate governance after providing finance. For example, research has demonstrated that an overvalued exchange rate and an overextended domestic lending boom often precede a currency crisis. More specifically, recent research shows that corruption has a strongly negative effect on FDI inflows.
In this paper, therefore, the two terms are used interchangeably.
In addition, the results, after inclusion of institutional variables, suggest that the impact of financial globalization on financial development will be positive if a country has good quality of institutional structure. In addition, some developing countries that open their capital markets appear to accumulate unsustainably high levels of external debt.
Causes of financial globalization
Particularly, based on the studies of Prasad et al. Whereas financial globalization has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing in line with limited portfolio diversification nor the costs of amplifying global financial shocks. Financial globalization chooses the most productive technology Saint Paul, as cited in De Gregorio, Although it is difficult to distill new and innovative policy messages from the review of the evidence, there appears to be empirical support for some general propositions. By contrast, some countries in Africa have few formal restrictions on capital account transactions but have not experienced significant capital flows. The best performance corresponds to small countries like Dominican Republic 0. USA has a mean of 0. As noted by several authors, most of the cross-country differences in per capita incomes stem not from differences in the capital-labor ratio but from differences in total factor productivity, which could be explained by "soft" factors such as governance and the rule of law. First, international investors have a tendency to engage in momentum trading and herding, which can be destabilizing for developing economies. The principal conclusions that emerge from the analysis are sobering but, in many ways, informative from a policy perspective. Following the classification of Levine , , a financial system has five basic functions: 1. In the world there are financial systems that are more developed than others, that is to say, financial systems that perform basic functions better more efficiently than others, and thanks to financial globalization it is possible to import a developed financial system, through a process of catching up.
This finding is potentially consistent with the view that international financial integration can help to promote domestic financial sector development, which, in turn, can help to moderate domestic macroeconomic volatility.
In addition, as is discussed more extensively later in this paper, some of the countries with capital account liberalization have experienced output collapses related to costly banking or currency crises. There has been not only a much greater volume of flows among industrial countries but also a surge in flows from industrial to developing countries.
In the beginning, studies employed more graphic analysis and least squares LS ; later models with panel data DP ; and recently dynamic panel data and generalized method of moments GMM.
based on 86 review