Publications

Financial Globalization, A Reappraisal
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by Rogoff, Kenneth S.; Kose, M. Ayhan; Prasad, Eswar; Wei, Shang-Jin
The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, while the macroeconomic evidence remains inconclusive. At the same time, some studies argue that financial globalization enhances macroeconomic stability in developing countries, while others argue the opposite. We attempt to provide a unified conceptual framework for organizing this vast and growing literature, particularly emphasizing recent approaches to measuring the catalytic and indirect benefits to financial globalization. Indeed, we argue that the indirect effects of financial globalization on financial sector development, institutions, governance, and macroeconomic stability are likely to be far more important than any direct impact via capital accumulation or portfolio diversification. This perspective explains the failure of research based on crosscountry growth regressions to find the expected positive effects of financial globalization and points to newer approaches that are potentially more useful and convincing.
Publication Type: WCFIA Working Paper
Published Date: December 2006
Field of Interest: Global Issues
Rogoff, Kenneth S., M. Ayhan Kose, Eswar Prasad, and Shang-Jin Wei. "Financial Globalization, A Reappraisal." Working Paper 2008-0108, Weatherhead Center for International Affairs, Harvard University, December 2006
Revised version of International Monetary Fund, Working Paper WP/06/189, August 2006.