TY - JOUR AU - Kose,M. Ayhan AU - Prasad,Eswar S. AU - Taylor,Ashley D. TI - Thresholds in the Process of International Financial Integration JF - National Bureau of Economic Research Working Paper Series VL - No. 14916 PY - 2009 Y2 - April 2009 UR - http://www.nber.org/papers/w14916 L1 - http://www.nber.org/papers/w14916.pdf N1 - Author contact info: M. Ayhan Kose Research Department International Monetary Fund 700 19th Street, N.W. Washington, DC 20431 E-Mail: akose@imf.org Eswar S. Prasad Dyson School of Applied Economics and Management Cornell University 440 Warren Hall Ithaca, NY 14853 Tel: 607/255-5687 Fax: 607/255-9984 E-Mail: eswar.prasad@cornell.edu Ashley D. Taylor Poverty Reduction and Economic Management Unit Europe and Central Asia Region World Bank Washington, DC 20433 E-Mail: ataylor2@worldbank.org AB - The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain "threshold" levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality -- the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities. ER -