Does Financial Integration Matter for Financial Development? Evidence from the East Asian and Pacific Region

Taghizadeh-Hesary, Farhad; Phi, Nguyet Thi Minh; Hong, Hanh Hoang Thi; Chu, Vu Tuan

doi:2019.34.4.591

The Journal of Economic Integration 2019 December;34(4) :591-618.
DOI: https://doi.org/10.11130/jei.2019.34.4.591

Does Financial Integration Matter for Financial Development? Evidence from the East Asian and Pacific Region

Farhad Taghizadeh-Hesary, ¹ Nguyet Thi Minh Phi, ² Hanh Hoang Thi Hong, ³ Vu Tuan Chu, ⁴

¹Tokai University, Japan
²Academy of Finance, Vietnam / Centre for Applied Economics and Business Research, Vietnam
³Academy of Finance, Hanoi, Vietnam
⁴National Economics University, Vietnam / Centre for Applied Economics and Business Research, Vietnam

Corresponding Author: Nguyet Thi Minh Phi ,Tel: +84 829 010 574, Email: minhnguyetphi.aof@gmail.com

ABSTRACT

This paper assesses the impact of financial integration on financial development and establishes thresholds for materializing gains of financial advances from financial globalization using a sample of 34 countries from the East Asian and Pacific region. Following the approaches of Kose et al. (2011) and Asongu and De Moor (2016), we test non-linearity within the financial openness and financial development nexus through semi-parametric ordinary least-squares regression, and then, we develop threshold dynamics models. According to our findings, the effect of financial integration on financial development significantly changes across different financial inflows. When using external debt as a proxy for financial openness, there exists a robust significant inverted U-shaped relationship between financial integration and financial development. The empirical findings also suggest that the financial integration-development nexus is contingent on the level of trade openness, national income, and institutional quality. The results are robust to different measures of financial development and integration, the inclusion of other determinants of financial development, and considerations of endogeneity.

JEL Classification

F36: Financial Aspects of Economic Integration
F40: General
O16: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O55: Africa

Keywords: Financial integration | Financial development | Trade openness | GDP per capita | East Asian and Pacific region