Financial Integration and Financial Development: Does Financial Integration Matter?

The aim of this paper is to investigate the effects of financial development and financial integration on economic growth in 89 developed and countries in transition, from the period of 1996 to 2007. We have focused in modeling threshold effects regarding financial markets depth as measure of economic absorption capacity of the countries. The results show that both financial development and integration have positive effect on economic growth in countries in transition, which is not case for developed countries. However, the effects are highly non-linear. First, the effect of development domestic financial markets on growth is higher in less developed countries. The effect may vanish as financial development reaches the level of the developed economies. Secondly, financial integration may not have a positive effect on growth, as its effects depend on the development of domestic financial markets, macroeconomic stability, and quality of institutions.