Is a more financially open world riskier?

Mikhail Stolbov

International Economics, 2019, vol. 157, issue C, 99-116

Abstract: The paper studies co-movement and causality between global financial openness and nearly all known types of financial crises during 1970–2014. It builds on a composite measure of global financial openness, which synthesizes three well-established indicators (de-jure, de-facto capital account openness and the KOF economic globalization index). I use linear and nonparametric Granger (no) causality tests as well as wavelet-based techniques to characterize the dynamic dependence, which appears rather weak. Only in case of systemic and triple crises, this dependence is found more robust. I offer two explanations for the elusive openness-crisis nexus. First, the impact of global financial openness on the frequency of crises can be indirect, transmitted through global macro-fundamentals (world real GDP growth rates, global inflation and commodity prices). Second, capital account liberalization can be self-reinforcing. Despite an increased risk of crises, countries, which have partly implemented such reforms, are likely to proceed. In doing so, they are often guided by their peers in a regional integration agreement. Overall, the findings of the paper question the widespread assertion that increasing global financial openness undermines financial stability.

Keywords: Capital account liberalization; Causality; Financial crises; Financial openness; Wavelets (search for similar items in EconPapers)
JEL-codes: C32 F30 F65 G01 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:157:y:2019:i:c:p:99-116

DOI: 10.1016/j.inteco.2018.09.002

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