Financial globalization, financial development and growth in emerging economies.

Summary Financial globalization allows for the mobility of capital flows around the world, which, according to theoretical studies, can be offset by the shortage of capital in less developed countries. On the other hand, the growth of emerging countries is more volatile after their financial opening and they have not received as much capital as expected. To explain these paradoxical phenomena, three models are built around financial development, financial openness, and growth or capital flows. The first model incorporates the operation of monitoring in a nested generation model. Financial development can be measured by comparing the outcome of the model with and without financial imperfections. The impact of financial development on growth has two dimensions. The lack of financial development reduces effective productivity and worsens the credit constraint. The evolution of the two dimensions is different and not monotonic. The conditions of equilibrium in autarky and in openness are different. The two dimensions of financial development are then considered in a small economy model. Multiple equilibria exist in openness and there is a threshold effect. This explains specific consequences of financial openness to emerging countries. In the third model, financial development and financial openness together determine capital flows. Openness does not ensure the gain of capital inflows. The possibility of capital outflow is increased if the domestic financial sector is less developed.