Kose, Prasad, Rogoff, and Wei (2009)

Question 1

What is Kose, Prasad, Rogoff, and Wei (2009) about?

Answer 1

This paper is essentially a literature review of literature on financial globalisation.

Argue that financial openness is likely to bring collateral benefits through improvements in institutions, governance and macroeconomic policies

Question 2

3 Findings of Kose, Prasad, Rogoff, and Wei (2009)?

Answer 2

1. No correlation between financial openness and income growth without control. With control, financial openness negatively predicts growth. (Bad!)
2. No evidence that financial integration increased risk sharing or reduced consumption volatility. (Bad!)
3. No evidence that financial globalization makes countries more susceptible to financial crises (Good!)

Question 3

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Growth?

Answer 3

theory says capital goes where returns are highest, greater diversification leads to more stability.

Question 4

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Volatility?

Answer 4

there is no evidence that financial globalization has delivered on the promised benefit of improved international risk sharing and reduced volatility of consumption growth. Declining volatility since 80s – causes debated.

Question 5

What was Kose, Prasad, Rogoff, and Wei (2009)’s measurement of financial openness?

Answer 5

most effective to use de facto (not de jure) measures of openness (endogeneity problem); debate over gross flows or net flows for analysis.

Question 6

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Patterns of Financial Globalisation?

Answer 6

FDI and portfolio equity flows have become the dominant form of new flows into developing economies, although debt still accounts for more than half of the stock of all external liabilities.

Question 7

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Effects on growth of financial liberalizaiton?

Answer 7

The literature suggests that declining economies are in general more likely to be financially closed, though the direction of causality is not clear.

Question 8

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on financial liberalization on crises susceptibility?

Answer 8

analysis of effects of capital controls on susceptibility to financial crises: countries with capital controls more subject to crises. ‘‘selection effect’’—countries with poor macroeconomic fundamentals put controls in place to insulate themselves from crises.

Question 9

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on FDI?

Answer 9

argued that FDI less volatile than other inflows -> countries less vulnerable to sudden stops/reversals of flows.

Question 10

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Debt flows?

Answer 10

procyclical & volatile nature, especially short-term bank loans, magnify adverse impact of negative shocks on growth.

Question 11

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Collateral benefits?

Answer 11

accumulating—not yet definitive—evidence: financial integration serves important catalyst for number of indirect benefits, which we term potential ‘‘collateral benefits, mainly affect TFP.

Question 12

What was Kose, Prasad, Rogoff, and Wei (2009)’s take on Thresholds?

Answer 12

plenty evidence: opening capital account without well-developed, well-supervised financial sectors, good institutions, sound macro policies can hurt country by making structure of inflows unfavourable and country vulnerable to stops or reversals of flows.

Question 13

What was Kose, Prasad, Rogoff, and Wei (2009)’s conclusion?

Answer 13

offering a guardedly positive overall assessment, points to some complications during the transition from low to high levels of financial integration.