The impact of international financial integration on economic growth: New evidence on threshold effects

- Gains from financial integration (IFI) may be contingent on other economic factors.
- We use the dynamic panel threshold regression (PTR) model to assess these pre-requisites.
- Institutions, income level, financial development, and government spending influence the IFI-growth nexus.
- Threshold conditions are less restricting for FDI and equity investments.

Recent research highlights that countries differ with respect to their experience with capital flows and do not systematically gain from capital account liberalization. This paper contributes to the empirical literature that investigates the circumstances under which international financial integration (IFI) is growth-enhancing. Relying on non-linear dynamic panel techniques, we find that countries that are able to reap the benefits of IFI satisfy certain threshold conditions regarding the level of economic, institutional and financial development, and government spending. Our results also reveal a differentiated behavior of FDI and portfolio equity liabilities compared to other types of capital flows, with threshold conditions being systematically less restricting for the former and growth effects significantly larger.