economic growth and International financial integration

The paper employs current data analysis and econometric methods to investigate the impact of global financial integration on economic development. It also examines the impact of various factors on this relationship, including financial development, macroeconomic policy, legal system development, economic development, and government corruption. For analyzing the extent of global financial integration in fifty-seven nations, the study employs a wide range of measurements and statistical analysis methodologies. Despite the article does not discuss any specific policy, it examines the soundness of government economic policies and their impact on the development of international financial integration in such countries. The study attempts to answer the research question through four different forms of empirical analysis. First, the researchers study the restrictive measure put in place by the international monetary fund, and the Quinn measure of restrictions on capital accounts. Also, as part of the first analysis, the researchers study the measures of capital flows and total capital flows to proxy for international financial integration. These proxies are studied because each marker has benefits and shortcomings. In the second empirical study, two new measures of global financial integration are studied. These stock measures are essential as additional indicators for the average measure of openness on a long term basis. The stock measures are also used because they are not as sensitive to short-term fluctuations in capital flows related to forces that are not associated with global financial integration and therefore could provide a more dependable measure of international financial integration than measures of the flow of capital. On the basis of the fact that they are proxies for the global financial integration, both the accumulated stock liabilities and accumulated stock liabilities and assets.

The third study is focused on a wide array of the terms of interaction, particularly, whether the integrated financial integration has a positive relationship with development where countries have effective banks, stock markets, and legal systems capable of upholding the law, fighting institutional corruption and appropriately high levels of real per capita gross domestic product. In principle, the study is a search for the financial, economic, policy, and institutional prerequisites for global financial integration to promote growth. Lastly, the authors of this study us the panel techniques available at the time to control for various forms of bias and explore the data acquired from a time series point of view. For the data gathered from the analysis, the International monetary fund measure equaled to one in years with restrictions on capital account transactions and zero in the years where there weren’t any constraints. This data is retrieved from the yearly IMF report on exchange restrictions and arrangements. The study did not make use of the Quinn measure as it is particularly subjective. It also has a linear relationship with the IMF restriction measure (correlation: 0.9). The Quinn measure is not considered because it was only available for two of the years in the sample period examined. The evaluation of stock of capital flows was implemented through the analysis of assets plus liabilities because the hypothetical concept of openness includes both. The components of stock of capital flows measures are also examined. However, greater focus is directed to the stock of total capital inflows and outflows. The researchers used three econometric strategies to evaluate the effect of international financial integration on economic growth. First, the study used basic test square regression (OLS) with a single observation per country over a twenty year period in between 1980 and 2000. Third, the study uses a universal methodology of moments, dynamic panel procedure as a control for possible sources of bias arising from those estimators that are entirely cross- sectional.

The entirely cross-sectional OLS study was based on data which was averaged over the period in between 1980 and 2000, with one observation per country and the standard errors associated with heteroskedasticity. The dependent variable in the regression equation used was growth (real per capita growth).

Two decades of data allowed the researchers to eliminate short-term political influences, business cycle changes and focus the study on long-term growth. A minute variation in the first equation was used to determine whether international financial integration resulted in growth only under specific institutional, policy, and economic conditions.

The results obtained in table two were in agreement with prior cross-country growth regressions. The logarithm of initial income was observed to be significant and negative, which was evidence of conditional convergence. It was also found that the logarithm of initial schooling was positive and significant, presenting the possibility of a positive relationship between the level of education in the workforce and future growth of the economy. The macroeconomic policy indicators, government balance, and inflation all present the expected values. Although inflation and fiscal stimulus enter the growth equation with joint significance neither enters with the individual; significance in the) OLS regression. It is hard to separate the impact of fiscal surplus from the impact of the rate of inflation. The findings for benchmark regression were found to be largely consistent across the three econometric analyses. The two-stage regression results presented the same sign as the OLS regressions.

From the results obtained, the researchers concluded that the data did not provide sufficient evidence to support the theory that international financial integration facilitated economic growth. Despite controlling for specific financial, policy, and institutional characteristics. However, these findings did not imply that financial integration did not have any relationship with economic prosperity. International financial integration is perceived to have a positive correlation with educational Attainment, reach per capita GDP, stock market development and the adherence to legal order in the country, implying that successful economies are generally open. The study found that the international financial integration is not directly related to economic growth on the basis of various economic strategies and integration measures the authors that although there are isolated exceptions. The researchers warn that the paper’s findings must be interpreted with caution. Because there significant hindrances to the measurement of openness to the international financial transaction. There are various types of financial transaction and countries put in place complicated barriers to the measurement of openness. Although the study utilized newer, more extensive measures for analyzing international financial integration, each of the measures could be criticized for its failure to establish the individual barriers to financial transactions. The study used the authors of this study acknowledge the fact that that the results of the analyses could have been affected by the use of a variant of the standard two-step system estimator designed to control for heteroskedasticity. The approach tends to result in overfitting and possibly biased standard error. The authors attempted to address this bias by applying each moment condition to all available periods. However, the application of this estimator reduced the number of periods by one. The modified estimator did not allow for the use of the first and second period.