Financial Globalization, Economic Growth, and the Crisis of 2007-09 [NOOK Book]

Overview

This book examines the role of financial globalization in economic growth and derives corresponding implications for economic policy. Although economists have debated the importance of openness to international trade, they generally agree that in the market for goods, international openness is more favorable to growth than a largely closed economy. In contrast, whether external financial openness boosts or curbs growth has long been a ...

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Financial Globalization, Economic Growth, and the Crisis of 2007-09

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Overview

This book examines the role of financial globalization in economic growth and derives corresponding implications for economic policy. Although economists have debated the importance of openness to international trade, they generally agree that in the market for goods, international openness is more favorable to growth than a largely closed economy. In contrast, whether external financial openness boosts or curbs growth has long been a controversial issue, and it has become even more so with the outbreak of the global financial crisis of 2007-09.

The East Asian financial crisis of the late 1990s raised doubts on this issue, and helped spur a wave of empirical research on it. Supporters of financial globalization—such as Stanley Fischer and Lawrence Summers—maintained that, with the right policies, open capital markets continued to be a powerful means for enhancing growth. Critics, including Jagdish Bhagwati and Joseph Stiglitz, argued that the crisis demonstrated that, unlike free trade in goods, free mobility for capital is counterproductive for growth. In the past decade a large empirical literature has emerged examining this question. Overall it has tended to find that financial globalization has "positive marginal effects on growth."

The US-led financial crisis of 2007-09 swept most of the developed and emerging-market economies into its vortex. The global crisis has set the stage for an intensification of the debate on financial openness. Some analysts and policymakers will be inclined to escalate calls for restrictions on capital flows. In the acute phase of the crisis that began in September 2008, major stock markets around the world plunged along with the US equity market, and many currencies fell sharply against the dollar (excluding the yen, which proved, like the dollar, to be a safe-haven currency). If countries had maintained closed capital markets, some may argue, they would not have been vulnerable to these shocks.

Cline asserts that financial globalization represents a significant factor in economic growth of emerging-market economies. Further, he argues that a significant portion of current-day GDP can be attributed to the cumulative influence of financial openness, especially in industrial countries.

This study surveys the extensive literature on this issue to arrive at a broad sense of the state of the evidence for and against the growth benefits of financial openness. The survey is critical in the sense that it seeks to evaluate strengths and weaknesses of the various studies in addition to summarizing their results. It then applies leading quantitative models from the literature to arrive at synthesis estimates of the contribution of financial openness to growth for major industrial and emerging-market economies over the past four decades. Finally, the book considers the preliminary evidence on whether the 2007-09 financial crisis constitutes grounds for a major change in the policy verdict on financial openness. As part of that reconsideration, the analysis reviews the causes of the global crisis, as well as its principal events and policy interventions.

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Editorial Reviews

Journal of Economic Issues
Overall, this book provides a comprehensive and critical survey of the empirical studies on growth and financial globalization. ...[I]ts synthesis estimates of the gains and losses of financial openness are likely to offer new insights and make a major contribution to both research and policy on this difficult and far-reaching topic. It will be a valuable volume not only for professional economists and policymakers, but for upper-level undergraduate and graduate courses in international economics.
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Product Details

  • ISBN-13: 9780881325553
  • Publisher: Peterson Institute for International Economics
  • Publication date: 5/15/2010
  • Sold by: Barnes & Noble
  • Format: eBook
  • File size: 8 MB

Meet the Author

William R. Cline, senior fellow, has been associated with the Peterson Institute for International Economics since 1981 and holds a joint appointment at the Center for Global Development. During 1996-2001 while on leave from the Institute, Dr. Cline was deputy managing director and chief economist of the Institute of International Finance (IIF) in Washington, DC. The IIF conducts research on emerging-market economies for its membership of over 300 international banks, investment banks, asset management companies, insurance companies, and other financial institutions. He has been a senior fellow at the Peterson Institute for International Economics since its inception in 1981. Previously he was senior fellow, the Brookings Institution (1973-81); deputy director of development and trade research, office of the assistant secretary for international affairs, US Treasury Department (1971-73); Ford Foundation visiting professor in Brazil (1970-71); and lecturer and assistant professor of economics at Princeton University (1967-70). He graduated summa cum laude from Princeton University in 1963, and received his MA (1964) and PhD (1969) in economics from Yale University.

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Table of Contents

Preface

Acknowledgments

1 Overview 1

Research Context 2

Key Analytical Issues 4

Theoretical Expectations 11

Empirical Literature 13

Synthesis Estimates 18

Quantifying Crisis Effects 25

Quantifying Debt versus Equity Effects 26

Implications of the 2007-09 Crisis 28

Conclusion 33

Appendix 1A Covered Interest Parity as a Measure of Financial Openness 37

Appendix 1B Analogy to Gains from Trade 39

Appendix 1C Tests for Compositional Differences in Growth Impact of Financial Openness 41

2 A Critical Survey of Literature 45

Cross-Country Growth Regressions 46

Theoretical and Calibreated Studies 116

Diversification Gains and Consumption Smoothing 119

Summary Surveys 131

Conclusion 142

Appendix 2A Weighting Cross-Country Regression Results in Meta-Analysis 145

Appendix 2B Gourinchas-Jeanne Model of Gains from Financial Integration 155

Appendix 2C Gemini: A Simple Model of International Risk Sharing 161

Appendix 2D Potential Circularity in the Knack-Keefer Government Reputation Variable 165

Appendix 2E Current Account Deficits and Growth 167

3 The Impact of Financial Globalization on Growth: Country-Specific Estimates 171

The Synthesis Approach 172

Trends in Financial Openness 173

Calibration 180

Results for General Financial Openness 183

Weighting Nonsignificant Model Estimates 192

Results for Direct Investment Openness 201

Comparison with Theoretical Expectations 208

Conclusion 213

Appendix 3A Normalizing Model Coefficients for Synthesis Analysis 217

Appendix 3B Temporary versus Permanent Growth Acceleration in the Henry Model 223

Appendix 3C Degree of Correlation among Alternative Measures of Financial Openness 229

4 The Financial Crisis of 2007-09 and Financial Globalization 235

Evolution 236

Causes 238

Status by Late 2009 240

Implications for Financial Openness in Emerging-Market Economies 255

Conclusion 260

Appendix 4A Key Events and Policy Responses 261

Appendix 4B Causes of the Crisis 279

Appendix 4C Contemporary Policy Diagnoses from September 2008 to February 2009 301

Appendix 4D Economics of the Geithner Plan 315

Appendix 4E Financing Gaps, Reserves, and Official Finance in the Global Financial Crisis 325

References 333

Index 345

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