Financial Integration, Economic Growth and Financial Stability
Financial integration is a strong and growing force shaping the international economic landscape. This research group analyses the role of financial integration for economic growth and financial stability.
Neoclassical economics suggest that an integrated global financial market can boost economic growth through reduced capital costs and increased risk-sharing. However, countries with a liberalised capital account in fact do not necessarily perform better than economies with capital controls, and the last global financial crisis caused a reversal to the process of financial globalisation. Therefore, reevaluating the role of financial integration for economic growth and financial stability is of great importance for policy discussion as well as academic research.
This research group aims at finding answers to the following questions: First, the group investigates how the productivity of firms is affected by the access to international capital and whether capital-intensive sectors benefit more from capital account liberalisation than other sectors. In addition, this group explores the structural transformational consequences of financial integration. Second, international capital is fueled into the economy through financial institutions. The group analyses whether the cross-border capital flow alternates banks’ behaviour and specifically, how the financing maturity, structure and systemic risk are affected. Third, international organisations like the IMF suggested a gradual path to liberalise the capital account, the main idea of which is to liberalise the inward flow before the flow out, and the FDI flow before the flow of debt and equity. However, empirical evidence is rare. This group studies whether and how the sequencing of capital account liberalisation matters for financial stability.
Research ClusterFinancial Stability and Regulation
From World Factory to World Investor: The New Way of China Integrating into the World
in: China Economic Journal, No. 2, 2017
This paper argues that outward direct investment (ODI) is replacing international trade as the new way China integrates into the world. Based on two complementary datasets, we document the pattern of Chinese ODI. We argue that the rapid growth of China’s ODI is the result of strong economic development, increasing domestic constraints, and supportive government policies. Compared with trade integration, investment integration involves China more deeply in global business. As a new global investor, China’s ODI in the future is full of opportunities, risks, and challenges. The Chinese government should improve bureaucracy coordination and participate more in designing and maintaining international rules to protect ODI interests.
Within Gain, Structural Pain: Capital Account Liberalization and Economic Growth
in: New Structural Economics Working Paper No. E2018010, 2018
This paper is the first to study the effects of capital account liberalization on structural transformation and compare the contribution of within term and structural term to economic growth. We use a 10-sector-level productivity dataset to decomposes the effects of opening capital account on within-sector productivity growth and cross-sector structural transformation. We find that opening capital account is associated with labor productivity and employment share increment in sectors with higher human capital intensity and external financial dependence, as well as non-tradable sectors. But it results in a growth-reducing structural transformation by directing labor into sectors with lower productivity. Moreover, in the ten years after capital account liberalization, the contribution share of structural transformation decreases while that of within productivity growth increases. We conclude that the relationship between capital account liberalization and economic growth is within gain and structural pain.