The role of domestic financial and economic development in financial integration

ABSTRACT

Using two-step system generalized method-of-moments on an unbalanced panel of 75 countries from 1996 to 2010, this study shows that financial development’s effect on the pace of a country’s financial integration is conditional on economic development. Indeed, the results validate the observation that greater financial development conditioned on similar levels of economic development should precede closer financial integration.

KEYWORDS:

• Financial integration
• financial development
• economic development
• system generalized method-of-moments estimator

JEL CLASSIFICATION:

• F21
• F36
• G21
• G23
• O10

Acknowledgements

This article is part of K.J.G. Cheng's Master’s thesis and he is grateful to his mentors from the University of the Philippines School of Economics, especially Sarah Lynne Daway and Charles Horioka. Comments given by the attendees of the 2015 Asia Pacific Trade Seminars held in Canberra, Australia, by Renato Reside Jr., by Miguel Antonio Estrada, and Noel Reyes were extremely helpful. The usually disclaimer applies here.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This was done to ensure satisfactory AR(2) and Hansen test results.

Additional information

Funding

K.J.G. Cheng thanks the University of the Philippines Office for International Linkages for providing a travel grant that allowed him to present the preliminary version of this article in the 2015 Asia Pacific Trade Seminars held in Canberra, Australia.