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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-Hesary1
Nguyet Thi Minh Phi2
Hanh Hoang Thi Hong and 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
Copyright ©2019 Journal of Economic Integration
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
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