The Causality Issue in the Financial Openness and Economic Growth Nexus: Empirical Evidence from Selected Emerging Countries: 1975-2011

This paper investigates empirically the causal relationship between capital account liberalization and economic growth using the Toda and Yamamoto’s approach for selected emerging countries during the period 1975-2011. The evidence seems to be supportive of a causality running from capital account liberalization to economic growth. This causality is found to be unidirectional in general with exception of Malaysia and South Korea where the causality in the other direction is also significant. Moreover this causality is found to be running through boosting capital accumulation rather than efficiency. This is particularly true in Malaysia and South Korea especially when we use the Chinn and Ito’s financial openness index. All these findings relative to causality also seem to be corroborated by the generalized variance decomposition approach and especially in the case of Malaysia, Singapore and South Korea.