The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. We attempt to provide a unified conceptual framework for organizing this vast and growing literature. This framework allows us to provide a fresh synthetic perspective on the macroeconomic effects of financial globalization, both in terms of growth and volatility. Overall, our critical reading of the recent empirical literature is that it lends some qualified support to the view that developing countries can benefit from financial globalization, but with many nuances. On the other hand, there is little systematic evidence to support widely-cited claims that financial globalization by itself leads to deeper and more costly developing country growth crises.

Milesi-Ferretti, Assaf Razin and numerous other colleagues and seminar participants for comments and helpful discussions and to Sarma Jayanthi for research assistance. The views expressed herein are those of the authors and are not necessarily those of the IMF or the National Bureau of Economic Research.

Milesi-Ferretti, Assaf Razin and numerous other colleagues and seminar participants for comments and helpful discussions and to Sarma Jayanthi for research assistance. The views expressed herein are those of the authors and are not necessarily those of the IMF or the National Bureau of Economic Research.

This article documents the main stylized features of macroeconomic fluctuations for 12 developing countries. It presents cross-correlations between domestic industrial output and a large group of macroeconomic variables, including fiscal variables, wages, inflation, money, credit, trade, and exchange rates. Also analyzed are the effects of economic conditions in industrial countries on output fluctuations in the sample developing countries. The results point to many similarities between macroeconomic fluctuations in developing and industrial countries (procyclical real wages, countercyclical variation in government expenditures) and some important differences (countercyclical variation m the velocity of monetary aggregates). Their robustness is examined using different detrending procedures. 1. For an overview of the literature on industrial countries, see, for example, Backus and Kehoe (1992), Horito and Kollintzas (1994), and van Els (1995).

We analyze the evolution of the degree of global cyclical interdependence over the period 1960–2008. Using a dynamic factor model, we decompose macroeconomic fluctuations in output, consumption, and investment into a global factor, factors specific to country groups, and country‐specific factors. We find that during 1985–2008, there is some convergence of business cycle fluctuations among industrial economies and among emerging market economies. Surprisingly, there is a concomitant decline in the relative importance of the global factor. We conclude that there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.

Contrary to the predictions of standard theoretical models, non-industrial countries that have relied more on foreign finance have not grown faster in the long run. By contrast, growth and the extent of foreign financing are positively correlated in industrial countries. We argue that the reason for this difference may lie in the limited ability of non-industrial countries to absorb foreign capital -especially because of the difficulty their financial systems have to allocate it to productive uses, and because of the proneness of these countries to exchange rate appreciation (and, often, overvaluation) when faced with such inflows. Our paper suggests that the current anomaly of poor countries financing rich countries may not really hurt the former's growth, at least conditional on their existing institutional and financial structures. Our results do not imply that there is no role for foreign finance in the process of economic development or that it is natural for all types of capital to flow "uphill". Indeed, the patterns of foreign direct investment flows have generally been more in line with the predictions of theory. However, there is no evidence that providing additional financing in excess of domestic savings is the channel through which financial integration delivers its benefits. 1 We are grateful to

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and seminar participants for useful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF, IMF policy, or the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.