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The impact of international financial integration on economic growth

By Duong Thi Ngoc Quynh (VNP 23)

Supervisor: Dr. Nguyen Vu Hong Thai

Abstract:

In recent decades, policymakers and academic researchers have been interested in the relationship between international financial integration and economic growth because, in theory, the open capital account can foster economic growth through direct and indirect channels. However, pioneering researchers have faced many difficulties in finding a good proxy for financial integration. Consequently, empirical studies yield conflicting conclusions about the growth effect of open capital accounts. Generally, there are two typical indicators, one related to government restriction and another one related to actual international capital flows. In this study, the author favors using the latter because the volume indicators can measure the magnitude of capital integration. Moreover, the additional advantage is the wide availability of data and not latch on to many subjective decisions. The present study contributes evidence of this nexus to the empirical literature by employing the dataset encompassing 178 countries over the period 1996-2015. The study conducts cross-country and panel analyses with a wide range of estimation methods, including Ordinary Least Square (OLS), Two-stage Least Square (2SLS), Fixed Effect Model, and Generalized Method of Moments (GMM). The findings reveal that international financial integration's beneficial impacts on economic growth are likely to be too small to be distinguished from zero, although international financial integration is negatively associated with growth and statistically significant.

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