The Impact of Financial Openness on Economic Integration: Evidence from the Europe and the Cis



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. Infrastructure Investment in Network Industries: The Role of Incentive Regulation and Regulatory Independence
2. The name is absent
3. Can genetic algorithms explain experimental anomalies? An application to common property resources
4. Behavior-Based Early Language Development on a Humanoid Robot
5. Geography, Health, and Demo-Economic Development
6. TWENTY-FIVE YEARS OF RESEARCH ON WOMEN FARMERS IN AFRICA: LESSONS AND IMPLICATIONS FOR AGRICULTURAL RESEARCH INSTITUTIONS; WITH AN ANNOTATED BIBLIOGRAPHY
7. Structural Conservation Practices in U.S. Corn Production: Evidence on Environmental Stewardship by Program Participants and Non-Participants
8. The name is absent
9. Design and investigation of scalable multicast recursive protocols for wired and wireless ad hoc networks
10. Fortschritte bei der Exportorientierung von Dienstleistungsunternehmen