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 Cluster
Financial Stability and Regulation

Your contact

Professor Xiang Li, PhD
Professor Xiang Li, PhD
Mitglied - Department Macroeconomics
Send Message +49 345 7753-805 Personal page

Refereed Publications


Does Capital Account Liberalization Affect Income Inequality?

Xiang Li Dan Su

in: Oxford Bulletin of Economics and Statistics, No. 2, 2021


By adopting an identification strategy of difference‐in‐difference estimation combined with propensity score matching between liberalized and closed countries, this paper provides robust evidence that opening the capital account is associated with an increase in income inequality in developing countries. Specifically, capital account liberalization, in the long run, is associated with a reduction in the income share of the poorest half by 2.66–3.79% points and an increase in that of the richest 10% by 5.19–8.76% points. Moreover, directions and categories of capital account liberalization matter. The relationship is more pronounced when liberalizing inward and equity capital flows.

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What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?

Yiping Huang Xiang Li Chu Wang

in: Journal of Corporate Finance, 2021


This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we provide evidence of monetary policy's impact on a nonbank financial institution's risk-taking. We find that the search-for-yield is the main driving force of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and greater riskiness of credit allocation. However, these changes do not necessarily relate to a larger loan amount on average.

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From World Factory to World Investor: The New Way of China Integrating into the World

Bijun Wang Xiang Li

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.

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Working Papers


Globalisation, Productivity Growth, and Labour Compensation

Christian Dreger Marius Fourné Oliver Holtemöller

in: IWH Discussion Papers, No. 7, 2022


Since the onset of globalisation, production activities have become increasingly fragmented and organised in global value chains (GVC). These networks facilitate trade in intermediaries across industrial sectors and countries and change the conditions for policies to respond to shocks. In this paper, we contribute to the understanding of the effects of GVC on productivity and labour shares in advanced and emerging economies. As indicators for globalisation we use the foreign share in intermediate inputs and the foreign share in value added, extracted from international input output tables. Estimates based on local projections reveal a positive relationship between globalisation and productivity. Moreover, we are able to reject the hypothesis that a higher degree of international integration in country-industry pairs is negatively associated with the change in the labour share for advanced countries.

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The Role of State-owned Banks in Crises: Evidence from German Banks During COVID-19

Xiang Li

in: IWH Discussion Papers, No. 6, 2022


By adopting a difference-in-differences specification combined with propensity score matching, we provide evidence using the microdata of German banks that stateowned savings banks have lent less than credit cooperatives during the COVID-19 crisis. In particular, the weaker lending effects of state-owned banks are pronounced for long-term and nonrevolving loans but insignificant for short-term and revolving loans. Moreover, the negative impact of government ownership is larger for borrowers who are more exposed to the COVID-19 shock and in regions where the ruling parties are longer in office and more positioned on the right side of the political spectrum.

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How Does Economic Policy Uncertainty Affect Corporate Debt Maturity?

Xiang Li

in: IWH Discussion Papers, No. 5, 2022


This paper investigates whether and how economic policy uncertainty affects corporate debt maturity. Using a large firm-level dataset for four European countries, we find that an increase in economic policy uncertainty is significantly associated with a shortened debt maturity. Moreover, the impacts are stronger for innovation-intensive firms. We use firms’ flexibility in changing debt maturity and the deviation to leverage target to gauge the causal relationship, and identify the reduced investment and steepened term structure as the transmission mechanisms.

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Technology Adoption and the Bank Lending Channel of Monetary Policy Transmission

Iftekhar Hasan Xiang Li

in: IWH Discussion Papers, No. 14, 2021


This paper studies whether and how banks‘ technology adoption affects the bank lending channel of monetary policy transmission. We construct a new measurement of bank-level technology adoption, which can tell whether the technology is related to the bank‘s lending business and which specific technology is adopted. We find that lending-related technology adoption significantly strengthens the transmission of the bank lending channel, meanwhile, adopting technologies that are not related to lending activities significantly mitigates that. By technology categories, the adoption of cloud computing technology displays the largest impact on strengthening the bank lending channel. Moreover, higher exposure to BigTech competition is significantly associated with a weaker reaction to monetary policy shocks.

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Dilemma and Global Financial Cycle: Evidence from Capital Account Liberalisation Episodes

Xiang Li

in: IWH Discussion Papers, No. 13, 2021


By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows.

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