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Financial Integration and Financial System Development in Emerging Market and Developing Countries

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  • Fiskara Indawan

Abstract

The paper is investigating the relationship between financial integration proxied by composition of capital inflows and financial development inemerging economies. The composition of capital inflows are FDI inflow, external debt inflow and portfolio equity inflow, whereas the indicators of financial development are nine indices of new measure of financial development constructed by IMF that include financial development, financial institutions (banks), financial market (stock and debt market) as well as its depth, access and efficiency. Using dynamic panel data GMM estimation from 79 countries in emerging economies, the estimation results find that composition of capital inflow have positive and statistically significant in developing all aspect of financial development in emerging economies. Specifically, FDI inflow as the largest portion of capital inflow in emerging economies is closely associated with financial institutions depth, access and efficiency, and financial market depth and access. External debt inflow is positively effect financial institutions efficiency and financial market depth and efficiency. Moreover, portfolio equity inflow which hold the smallest portion among other inflow is closely related to financial institution depth, access and efficiency, and financial market depth and access. In general,those three composition of capital inflows are significantly increase the development of financial institutions and market, hence the deepening of financial system in emerging economies.

Suggested Citation

  • Fiskara Indawan, 2020. "Financial Integration and Financial System Development in Emerging Market and Developing Countries," Working Papers WP/07/2020, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp072020
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    More about this item

    Keywords

    financial integration; financial development; capital inflow; financial institutions;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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