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Empirical paper on international finance or open economy macroeconomics - Essay Example

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The economic question the paper attempts to answer is to establish merits of financial globalization and its implications for growth using the concept of thresholds effects in the process of financial integration. The paper explore if there is a properly defined threshold level…
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Empirical paper on international finance or open economy macroeconomics
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Download file to see previous pages A deep and well-supervised financial sector is essential for efficiently intermediating foreign finance into productive investments. It has also been shown to reduce the adverse effects of capital flow volatility. Countries with better institutions attract relatively more foreign direct investments and portfolio equity flows, which are more stable than debt flows, and as a result, the likelihood of promoting indirect benefits.
For each of the threshold category, an appropriate and conceptually sound measure was chosen. Financial depth; the proxy used for financial depth is the ratio of private credit to GDP. Also include in the measure of financial depth and development are stock market capitalization sum and credit to the national GDP, the ratio of GDP and institution measures such as creditors’ rights
ii. Institution quality; the proxy used to get aggregate institutional quality get derived from a simple average of the six World Bank Governance Indicators (WBGI). The six aspects of institutional quality covered by WBGI are: violence and profit stability; accountability and voice; quality of the regulatory; government effectiveness; the rule of law and control of corruption.
iii. Regulation; the proxy used is an index of the rigidity of labor regulations from the International Finance Corporation’s Doing Business Database. The database captures an economy’s ability to adapt to changing business conditions that include financial flows. Since data is only available from 2003, average for each country is used as a fixed regulation variable.
iv. Trade openness; the totals of imports and exports of goods and services, expressed as a ratio to GDP is used as the proxy. The measure of policy openness to trade can be defined as the proportion or level of years for which the trade regime/ era is an open one also got included.
v. Macro policies; the ...Download file to see next pagesRead More
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