integration. Section 3 introduces the econometric methodology and explains the
specification of the model. Section 4 discusses the results. Section 5 concludes,
drawing some policy implications and pointing to future lines of research. Tables and
variables are presented in the Appendix.
2. Some theoretical background.
This paper evaluates the effect of financial openness on two dimensions of economic
integration: international trade in goods and services and convergence of per-capita
income across countries. The theoretical underpinnings of the analysis are spelled out
in this section.
2.1. Financial openness and convergence of per-capita income.
Economic growth theory provides the rationale for linking financial openness (and
financial integration) to per-capita income. In both neo-classical and endogenous
growth models, per-capita income at a generic time t is determined by technology and
rates of accumulation of production factors (labour, physical and human capital)7.
Several arguments have been proposed in the literature to argue that financial
openness has an impact on such determinants of per-capita income.
One channel points to possible technological spillovers arising from capital account
liberalisation which spurs capital inflows and investments from abroad. Related
arguments emphasise the spillovers eventually stemming from transfers of skills and
increased competition. Another strand of research suggests that financial openness
will broaden risk-sharing opportunities for domestic investors, thus reducing the cost
of equity capital and hence increasing investment and the rate of capital accumulation.
Moreover, better risk-sharing options will allow countries to shift their investment
mix towards riskier and hence higher-return projects. On a different ground, the
political economy literature has pointed out the role of financial openness as a
commitment technology device. When economic policies are dynamically
inconsistent, capital account liberalization signals government’s intention to stick to
macroeconomic and financial discipline. This in turn reduces economic uncertainty
and hence favours longer-term investment and factors accumulation. Finally, financial
7 For a formal treatment of the neo-classical model see Mankiw et al. (1992). For a review of models of
endogenous growth see Barro and Sala-i-Martin (1995, Chapters 4 and 5).
More intriguing information
1. Better policy analysis with better data. Constructing a Social Accounting Matrix from the European System of National Accounts.2. Naïve Bayes vs. Decision Trees vs. Neural Networks in the Classification of Training Web Pages
3. Restricted Export Flexibility and Risk Management with Options and Futures
4. Secondary school teachers’ attitudes towards and beliefs about ability grouping
5. Insecure Property Rights and Growth: The Roles of Appropriation Costs, Wealth Effects, and Heterogeneity
6. Der Einfluß der Direktdemokratie auf die Sozialpolitik
7. The name is absent
8. The name is absent
9. The changing face of Chicago: demographic trends in the 1990s
10. IMMIGRATION AND AGRICULTURAL LABOR POLICIES