Nonlinearities in the Relationship Between Financial Integration and Economic Growth

In the literature there is a great debate on the growth effects of international financial integration. It is argued that the direction and the magnitude of the effect of financial integration on growth depend on some structural and economic characteristics of the economies. This implies that financial globalization can have asymmetric effects on economic growth due to some other factors. In this study we examine the effect of financial integration on growth mainly focusing on the threshold effects suggested by economic theory and empirical evidence. To this end, we employ Panel Smooth Transition Regression Models in order to investigate the asymmetric effects in the financial integration-growth relationship for a large number of countries for the period of 1970-2009. Besides estimating the threshold effects for all countries in the sample, we also examine whether these threshold effects differ for different country groups such as emerging economies, other developing countries and advanced countries. Our empirical results showed that international financial integration has asymmetric effects on growth due to financial development, institutional quality, trade openness and some macroeconomic variables of the economies. We also find that the signs and the magnitudes of these effects can differ for emerging, advanced and other developing countries.