Discussion Paper Details

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Title: Financial Globalization, Growth and Volatility in Developing Countries

Author(s): Ayhan Kose, Eswar Prasad, Kenneth Rogoff and Shang-Jin Wei

Publication Date: December 2004

Keyword(s): globalization, growth, international financial linkages and macroeconomic volatility

Programme Area(s): Institutions and Economic Performance, International Macroeconomics and International Trade and Regional Economics

Abstract: This Paper provides a comprehensive assessment of empirical evidence about the impact of financial globalization on growth and volatility in developing countries. The results suggest that it is difficult to establish a robust causal relationship between financial integration and economic growth. Furthermore, there is little evidence that developing countries have been consistently successful in using financial integration to stabilize fluctuations in consumption growth. However, we do find that financial globalization can be beneficial under the right circumstances. Empirically, good institutions and quality of governance are crucial in helping developing countries derive the benefits of globalization. Similarly, macroeconomic stability appears to be an important prerequisite for ensuring that financial globalization is beneficial for developing countries. Finally, countries that employ relatively flexible exchange rate regimes and succeed in maintaining fiscal discipline are more likely to enjoy the potential growth and stabilization benefits of financial globalization.

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Bibliographic Reference

Kose, A, Prasad, E, Rogoff, K and Wei, S. 2004. 'Financial Globalization, Growth and Volatility in Developing Countries'. London, Centre for Economic Policy Research.