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The interaction between globalization and financial development: new evidence from panel cointegration and causality analysis

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Abstract

The paper studies the impact of globalization on financial development in a sample of 32 developed and developing economies over the period 1989–2012. Indicators of financial development include three banking indicators (private sector credit, domestic credit, and liquid liabilities) and three indicators of stock market development (value traded, turnover ratio, and stock market capitalization), all relevant to GDP. Two panel estimation methodologies are under consideration: panel cointegration and panel VAR. The findings reveal that financial development affects economic growth and globalization positively. Globalization helps mobilize economic growth, but does not help financial development as it helps increase access to external financing. Quality institutions do not impact financial development although the latter increases incentives for better quality institutions in support of sustainable growth.

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Notes

  1. At the same time, openness to capital flows may also increase opportunities for portfolio risk diversification and consumption smoothing through borrowing and lending; producers who are able to diversify risks on world capital markets may invest in riskier (and higher-yield) projects, thereby raising the country’s rate of economic growth (Obstfeld 1994).

  2. Rahman and Shahbaz (2013) expose that foreign direct investment is a significant contributing factor to economic growth.

  3. The list of selected countries is given in the “Appendix.”

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Author information

Authors and Affiliations

  1. Central Bank of the United Arab Emirates, Abu Dhabi, United Arab Emirates

    Magda Kandil

  2. COMSATS Institute of Information Technology, Lahore, Pakistan

    Muhammad Shahbaz

  3. Lahore College for Women University, Jhang Campus, Lahore, Pakistan

    Samia Nasreen

Authors
  1. Magda Kandil
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  2. Muhammad Shahbaz
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  3. Samia Nasreen
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Additional information

The authors thank the Editor, Robert Kunst, and an anonymous referee for helpful comments. The views in the paper are those of the authors and should not be interpreted as those of the CBUAE or its policy.

Appendix

Appendix

Table 7 List of countries
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Table 8 Definition of variables and data sources
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Kandil, M., Shahbaz, M. & Nasreen, S. The interaction between globalization and financial development: new evidence from panel cointegration and causality analysis. Empir Econ 49, 1317–1339 (2015). https://doi.org/10.1007/s00181-015-0922-2

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  • DOI: https://doi.org/10.1007/s00181-015-0922-2

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