Interaction between Financial Systems, Economic Growth, and Globalization: A Transnational Perspective on Emerging Economies

Abstract

This study examines the impact of economic globalization on the development of 38 emerging economies' financial systems during the period 1980–2021. Using cointegration tests and vector error correction models, the study investigates the interdependence of financial development, economic growth, and globalization. Evidence indicates that private credit and the liquidity ratio are forces behind financial development. Financial development is positively influenced by economic growth and good governance, while trade openness poses a risk. However, the net impact of financial liberalization and capital account openness mitigates the risks, favoring the benefits of globalization. The study concludes that a strategic globalization policy can increase the nexus between financial development and economic growth, as long as risks from trade openness are properly addressed. Policy recommendations entail promoting financial liberalization, attracting foreign direct investment, and carefully managing openness in trade. These measures offer balanced policies for developing countries' sustainable financial growth.