Financial Integration, Productivity and Capital Accumulation


Understanding the mechanism through which financial globalization aspects economic performance is crucial for evaluating the costs and benefits of opening financial markets. This paper is a first attempt at disentangling the effects of financial integration on the two main determinants of economic performance: productivity (TFP) and investments. I provide empirical evidence from a sample of 70 countries observedbetween 1975 and 1999. The results for both de jure and de facto indicators suggest that financial integration has a positive direct effect on productivity, while it does not directly affect capital accumulation. I control for indirect effects of financial globalization through financial development and banking and currency crises. While the evidence on financial depth as an indirect channel is weak, the results are more robust for financial crises: they depress both investments and TFP, and are favored by financial integration, though only to a minor extent. The overall effect of financial liberalization is positive for productivity and negligible for investments.
Published as: Financial Integration, Productivity and Capital Accumulation in Journal of International Economics , Vol. 76, No. 2, 337--355, January, 2008