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Financial Integration, Globalization, Growth and Systemic Real Risk

Using data for a large number of advanced and emerging market economies during 1985-2009, this paper documents the dynamics of financial integration and assesses whether advances in financial integration and globalization yield the beneficial real effects resulting from a more efficient resource allocation predicted by theory. We find that: (a) financial integration has progressed significantly worldwide, within regions, and particularly in emerging markets; (b) advances in financial integration and globalization predict higher growth, lower growth volatility, as well as lower probabilities of systemic real risk realizations; (c) financial integration fosters domestic financial development and the liquidity of equity markets; and (d) the quality of institutions and corporate governance are important determinants of the levels of financial integration and globalization. Thus, financial integration and globalization appear to yield direct as well as indirect benefits in the form of improved countries’ growth prospects and lower systemic real risk.

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