The growth effect of international financial integration: evidence from cross country analysis

Abstract

Currently, international financial integration (IFI) is a trend of the world. However, there is little evidence of its positive impact on the economic growth. The reasons can be error in measurement of IFI indicators, the multicollinearity among variables in model (Quinn and Toyoda, 2008). They may lead to the inconsistent results and accounts in part for larger standard errors and biased estimator. Different data might also contribute to these inconsistent results. The targets of this paper is to study the role of IFI on economic growth with impact of macroeconomic instability using FDI and portfolio investment capital with 2 weighted ways to proxy for IFI. With the latest annual data in the period of 1982-2014, the paper employs GMM method for estimating the panel-data. We start by employing VIF indicators and normal distribution assumption to choose conditional variables, dropping outliers and collinearity. We also provide a global picture about the economic performance of countries in the world. In empirical analysis, my research finds a robust and positive statistically significant association between flow of FDI and the real GDP per capita growth. The finding emphasizes the important role of IFI in enhancing economic growth. We also find a weak evidence that macroeconomic instability has negative effect on the impact of IFI on economic growth. Interestingly, my thesis asserts the existence of inverse linkage between money supply and economic growth. This finding is sharply contrasts with conventional wisdom of many people who think that financial deepening will benefit for economic growth.