Domestic Institutions and the Bypass Effect of Financial Globalization

No 13148, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes a simple model to study the relationship between domestic institutions - financial system, corporate governance, and property rights protection - and patterns of international capital flows. It studies conditions under which financial globalization can be a substitute for reforms of domestic financial system. Inefficient financial system and poor corporate governance in a country may be completely bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward foreign direct investment. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector/poor corporate governance. However, the net effect for a developing country is more likely to be positive, the stronger its property rights protection. This is consistent with the observation that developed countries are often more enthusiastic about capital account liberalization around the world than many developing countries. A noteworthy feature of this theory is that financial and property rights institutions can have different effects on capital flows.

JEL-codes: F21 F30 G15 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-dev and nep-reg
Note: IFM CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Published as Jiandong Ju & Shang-Jin Wei, 2010. "Domestic Institutions and the Bypass Effect of Financial Globalization," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 173-204, November.

Downloads: (external link)
http://www.nber.org/papers/w13148.pdf (application/pdf)

Related works:
Journal Article: Domestic Institutions and the Bypass Effect of Financial Globalization (2010)
Working Paper: Domestic Institutions and the Bypass Effect of Financial Globalization (2010)
Working Paper: Domestic Institutions and the Bypass Effect of Financial Globalization (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13148

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13148

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().