Three Essays on Financial and Trade Integration

Abstract

Three Essays on Financial and Trade Integration Elena Bondarenko This dissertation consists of three essays on financial and trade integration. Financial and trade integration are the processes though which a country's financial and commodities markets become more integrated with those in other countries. The first essay addresses the determinants of financial integration, the second essay examines the contribution of financial and trade integration to the convergence in marginal products of capital, the third essay accesses the effect of international trade in physical capital on economic growth. The first essay addresses the empirical question of whether international financial flows are responsive to capital account restrictions or liberalization policies. The effect of capital controls on financial flows differs across countries and types of financial flows (FDI, portfolio equity, and debt). Capital controls are found to be effective for all types of international capital flows in developed countries. However, short-term volatile flows are not responsive to capital controls in developing countries. Capital controls can be an effective policy tool in developed countries with liberalized international trade and adequate reserves. Policies in developing countries should facilitate FDI flows and restrict non-productive short-term equity or debt flows in order to maintain macroeconomic stability and lower the probability of a crisis. The second essay examines the determinants of convergence in the marginal product of capital. The essays derives an empirical model from Solow's growth model and augment it to include global factors of financial flows and capital embodied in commodity trade. The marginal products of capital converges, however, this convergence is conditional upon country-specific variables such as reproducible capital share. Saving rates, foreign direct investment, and international trade are essential determinants of this conditional convergence. There is no evidence that debt financial flows reduce the global difference in the marginal product of capital. International trade also contributes to this convergence by equalizing international prices of investment and consumption goods. The final essay estimates the effects of inflows of foreign physical capital on the output per capita growth. The essay uses an open economy extension of a neoclassical growth model to include the share of foreign physical capital in domestic investment. Inflows of machinery and capital equipment reinforce a positive growth in output per worker. Non-industrial (non-OECD) countries that rely on foreign high-quality capital grow faster. The findings suggest that policies should facilitate trade liberalization in developing countries and strengthen the domestic ability to absorb technological benefits from abroad. iii Acknowledgments I would like to express my gratitude to my dissertation advisor and chair, Professor Shuichiro Nishioka, for taking me on as an advisee, for the guidance, time and constant support during my doc...

Does economic freedom promote financial development? Evidence from EU countries

“…However, in this case, we choose difference GMM over system GMM as the latter uses a larger number of instruments. The overidentifying restrictions and the instruments may not remain valid when the number of instruments exceeds the number of groups (Bondarenko, 2012). We conduct the Hansen test of overidentifying restrictions to determine the validity of instruments.…”