Varillas de anclaje
VERIFICACIÓN DE HIPÓTESIS.
There is much discussion about the impacts of financial integration. Recent developments in the theoretical and empirical literatures suggests that financial integration can spur economic growth, induce investments, and facilitate the development of domestic equity markets.
Despite these benefits, Kose, Prasad & Taylor (2011) have pointed out that, a country with financial openness may face potential risks of negative growth if certain threshold conditions are not attained. These threshold conditions include the fact that, financially integrated economies should strive to achieve institutional quality and financial depth by maintaining a low debt to GDP ratio. However, it has been observed that, the integration of financial markets (especially in the Euro Area) comes with an attendant increase in the level of government bonds held by foreigners (Elena, 2013). Consequently, Azzimonti, de Francisco
& Quadrini (2012) presented a multi-country political economy model in which governments‘ incentive to issue bond increases, when financial markets are internationally integrated.
In this case, the study reviewed the importance of their model, using empirical data for the MINT countries. The result supports the theoretical model that financial integration induces higher level of government debt. While the study did not claim that this implies causation, it is important, however, to stress that the highly significant positive relationship between a change in the index of financial integration and change in the level of real public debt for both measures of financial integration is a useful guide to the direction of influence.
Based on the different measures of financial integration (i.e. de jure and de facto), this study confirm that financial integration is positively correlated with growth. Although we found out that higher debt to GDP ratio negatively affect growth, financial integration, however, has a larger influence on growth than the debt to GDP ratio. Moreover, based on de jure measure of financial integration, we found out that smaller countries tend to optimize agents‘ welfare by issuing more debt, relative to larger countries, thus supporting the theoretical evidence in Azzimonti, de Francisco & Quadrini (2012) that, size plays an important role in determining the effectiveness of financial integration.
An important implication of this study is the need for an extensive research on the direction of causality between rising level of public debt and change in the index of financial integration. Understanding the path of causation will be an important step in evaluating whether better access to external financing, induced by financial markets integration, helps trigger sovereign debt crisis, as Azzimonti, de Francisco & Quadrini (2012) rightly observes, if debt crisis is more likely to result from higher level of public debt, then financial integration is a likely contributor to it.
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Appendix Figures
Figure 1: Average Public Debt to GDP Ratio in the MINT Countries
Source: Author‘s own calculation based on data from World Bank Development Indicator
0 15 30 45 60 75 90
Average Public Debt to GDP Ratio in MINT
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Figure 2: Average Growth Rate of Real GDP in the MINT Countries
Source: Author‘s own calculation based on data from World Bank Development Indicator
-2 0 2 4 6 8 10 12 14
Average growth Rate of Real GDP in MINT
90