An empirical framework : financial globalization and threshold effects

Flynn, Eimear; Saravia, Florencia; Cenzon, Josefina; Gupta, Nimisha; Tezel, Selena

An empirical framework : financial globalization and threshold effects

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Flynn, E, Saravia, F, Cenzon, J, Gupta, N, Tezel, S. An empirical framework : financial globalization and threshold effects. 2019. handle: http://hdl.handle.net/10230/43379

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Abstract

Is financial globalization beneficial to economies at all levels of development? Or are there certain “threshold” levels of financial, institutional and economic development a country must first attain in order to realize the growth benefits of globalization? Kose, Prasad and Taylor (2009) develop a unified empirical framework to answer this question. The debate on the literature is ongoing. Yet few studies have explored these questions in a post-crisis context. In this paper, we replicate and extend their work, paying close attention to the period 2005-2014. Our analysis yields three key results. First, the financial depth threshold above which countries can benefit from financial globalization increases from 66% to 81% when we consider the extended period. Second, the proportion of countries with depth levels above this threshold declines over time. Finally, the coefficients are smaller in absolute value over the period 1975-2014. Taken together, these results imply a breakdown in the relationship between financial depth, openness and growth since the Great Recession. Financial deepening on its own can no longer ensure positive growth effects of financial integration.