Essays on financial integration, financial development and economic growth
This dissertation studies the relationships among financial development, financial integration and growth. Chapter One motivates the dissertation by discussing the importance of financial market development and financial integration in economic growth. It also reviews recent literature and summaries the major findings. Chapter Two focuses on the effect of financial integration on growth. Using several measures of international financial integration for 83 countries and a panel data vector autoregressive (VAR) model, I find that financial integration promotes economic growth. Total inflows and total outflows, however, play different roles in growth. Capital inflows lead to economic growth in emerging market economies, while outflows have positive effects on growth in developed countries and negative effects on growth in emerging markets. Breaking down the components of total capital flows further, I find that FDI is responsible for the positive and significant effects of inflows on growth in emerging markets, while portfolio outflows affect growth in developed economies more than FDI outflows do. Chapter Three investigates the paths through which financial integration may affect growth. By examining the effects of financial integration on the finance-growth nexus in a series of regression with a rolling time window, I find that financial development promotes economic growth when there is a moderate amount of financial integration. Further investigation reveals that “deep” institutional fundamentals, measured by legal origin and political variables, play similar roles in promoting financial development and integration. In the final essay, I use four different measures of equity market development for 63 countries from 1990 to 2005 to estimate a set of dynamic panel VAR models using the system GMM methodology. I find that equity market development promotes real economic growth when the total value of traded shares is used as the financial measure. The other three measures of equity market development do not have significant effects on growth. The VAR models also suggest that the effect of stock market liquidity, as measured by value traded, has become stronger in recent years.