Financial Globalization and Economic Growth: Panel Causality Analysis for EU

Financial Globalization and Economic Growth: Panel Causality Analysis for EU

Murat Gündüz (Usak University, Turkey)
DOI: 10.4018/978-1-7998-1188-6.ch006

Abstract

The relationship between financial development and economic growth is one of the interesting topics of economic researches. Financial globalization is a term used to open up capital markets to the international arena and to capitalize on developed countries to developing countries. This chapter investigates the causality relationship between financial globalization and economic growth. In this study, the panel causality test of Emirmahmutoğlu and Kose (2011) was used for the European Union countries by using data from 1996-2016 period. According to the causality analysis conducted for the European Union, there is a causality from general financial globalization index to economic growth, from de facto financial globalization to economic growth and from economic growth to De jure financial globalization index.
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Introduction

The expression “globalization” is used by some researches in different meanings. Some see it as a process that is a key to the future development of the world economy and also unavoidable. Others regard it with suspicion or even fear as it does believe that it increases inequality within and between countries, threatens employment and the standard of living and prevents social progress (Der IWF-Stab, 2000).

Financial globalization is a concept that expresses the increasing global connections created by cross-border financial flows. The recent wave of financial globalization took place in the mid-1980s, and this led to an increase in capital flows between the industrial countries and, more importantly, the industrial and developing countries. In some developing countries, capital inflows have led to high growth rates. In some developing countries, significant financial crises with periodic collapses and significant macroeconomic and social costs were experienced due to high capital movements. As a result, there has been an intense debate in both academic and policy circles about the effects of financial integration on national economies (Prasad et al., 2005).

The idea of ​​financial globalization is often erroneously equated with the concept of globality. The global nature of the financial markets suggests that the world's major financial markets are integrated and that together they will form a global financial market in which capital no longer knows national barriers and moves freely from one country to another. This notion of the global nature of the financial markets is based on three important assumptions. First, full mobility of capital is required, meaning that both small and large investors invest their capital in a financial market where they find the best combination of profit and risk, regardless of the country in which the investment is to be made. Second, borrowers - individuals, companies and governments - are expected to have unrestricted access to capital, and there are few differences in the cost of capital for comparable investment projects. Third, with such an ideal “global” financial market, it is assumed that there are few differences between national financial markets in terms of financial regulation and that all market participants have the same choice of financial instruments (De Luna Martinez, 2002).

The globalization of financial markets can, in principle, help to increase the growth rates of the respective countries through many channels in developing countries. Some of these channels (increasing internal savings, reducing capital costs, transferring new technologies from developed countries to developing countries, and developing domestic finance sectors) have some direct impact on the determinants of economic growth. The globalization of financial markets can theoretically help to stimulate economic growth through different channels.

There are two extreme views about the effects of financial integration: First, integrated financial systems improve the allocation of productive resources, encourage innovation and entrepreneurship, develop market discipline, and help reduce the macroeconomic volatility of each country. Second, the free flow of capital increases the wealth gap between poor and wealthy countries and puts the local financial systems at risk of instability. Potentially, it is recognized that financial integration can bring many benefits to the economy, and will make economies more stable and flexible. Financial integration increases the flexibility of the global financial system by improving risk sharing and risk-sharing opportunities. Over time, it allows economic agents to better regulate the forms of consumption and investment that have been proven by financial integration and to increase the flow of foreign capital in Central and Eastern European countries (Resulaj, 2013).

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