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Financial Integration and Growth: A Nonlinear Panel Data Analysis

Author

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  • Duygu Yolcu Karadam

    (Department of Economics, METU)

  • Nadir Ocal

    (Department of Economics, METU)

Abstract

This paper employs Panel Smooth Transition Models (PSTR) to examine the financial integration and economic growth relationship for a large panel data set consisting of 82 countries and for three subsamples, namely emerging, industrial, and developing countries, for 1970-2010 periods. Unlike linear specifications with interaction terms, PSTR models are flexible enough to endogenously determine how the degree of institutional quality, financial sector development, trade openness, budget deficit, inflation volatility and financial integration can have a role in revealing asymmetries in financial integration-growth nexus. Except developing countries, empirical results strongly indicate nonlinear dynamics and imply that the impact of financial integration on growth is asymmetric depending on the threshold effects of these variables which show great variation not only from variable to variable but also for different country groups. As far as whole set of countries is concerned, our findings imply that countries having developed financial systems, qualified institutions and stable macroeconomic environment seem to be benefiting from financial integration. Moreover, nonlinear threshold effects are more apparent and different for emerging countries compared to the industrial countries. Unlike former economies, higher levels of financial integration and trade openness decrease benefits from financial openness for the industrial countries. Besides, high fiscal deficit has more pronounced negative effect on the growth of the industrialized countries compared to emerging economies and other indicators.

Suggested Citation

  • Duygu Yolcu Karadam & Nadir Ocal, 2014. "Financial Integration and Growth: A Nonlinear Panel Data Analysis," ERC Working Papers 1415, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    • Handle: RePEc:met:wpaper:1415
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    More about this item

    Keywords

    Financial Integration; Economic Growth; Panel Smooth Transition Models; Nonlinearity.;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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