The Role of Financial Integration in East Asia in Promoting Regional Growth and Stability

Chaipat Poonpatpibul, Surach Tanboon and Pornnapa Leelapornchai
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Chaipat Poonpatpibul: Bank of Thailand
Surach Tanboon: Bank of Thailand
Pornnapa Leelapornchai: Bank of Thailand

No 2006-05, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: This paper examines the role of financial integration in promoting growth and stability in East Asia. It first examines the degree of financial integration and finds that East Asia is more integrated with the developed markets than with regional markets. It then proceeds to investigate the benefits of regional financial integration on economic growth. Intraregional foreign direct investment is found to have a crucial role in enlarging trade within the region. Financial integration can also lead to better allocation of funds within the region, lower risk premium and cost of capital, and financial market deepening. However, financial integration may pose higher risks on economic stability via greater volatility of capital flows which can be magnified by increasing cross-border linkages. As East Asian countries will likely be exposed to a variety of new types of risks with greater international financial integration, regional financial cooperation will have to play an important role. Strengthening regional surveillance system, establishing regional crisis prevention and resolution framework, and building domestic and regional financial infrastructure particularly for long-term regional financing are necessary for enhancing long-term macroeconomic and financial stability as well as competitiveness of the region.

Pages: 67 pages
Date: 2006-05
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Citations: View citations in EconPapers (10)

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