Financial Integration and Economic Growth: An Empirical Analysis Using International Panel Data from 1974-2007

This paper studies the effects of financial integration on economic growth using an international panel data of 83 countries from 1974-2007. The effects of financial integration on economic growth differ considerably, depending on the type of external assets and liabilities as well as on the characteristics of countries that experience financial integration. In particular, when we break down external liabilities into FDI and equity liabilities and debt liabilities, the former has a positive impact on economic growth, while the latter, especially public debt, has a negative impact. We also find in general that countries with good institutions and developed financial markets benefit more from financial integration, and countries in Western Europe and North America as well as those in East Asia are more likely to meet these conditions. This paper then considers whether the effects of financial integration have changed over time. Finally, we provide some evidence that financial integration has an additional, indirect effect on economic growth through its impact on other determinants of growth such as the volume of international trade and the development of domestic financial markets.