Almanaseer, S. R. (2023) The Relationship Between Financial Integration and Financial Stability: an Application of Panel Smooth Transition Model
Keywords:Capital Flows, Financial INTEGRATION, Financial Stability, Inflation, Monetary Policy
Purpose: This research aims to determine the correlation between financial integration and financial stability and whether increasing financial integration leads to increased financial stability.
Theoretical framework: The study investigates the effect of growing financial integrity on financial stability and the causal association between the two variables.
Design/methodology/approach: The study uses an Autoregressive-Distributed Lag (ARDL) regression model with the help of least squares (OLS) regression to evaluate the relationship between financial integration and stability. This research work further employed a Panel Smooth Transition Model (PSTR) to determine the nonlinearity among two factors and investigated the entrance stage of financial boosting beyond which Total Factor Productivity (TFP) extension is possibly dampened.
Findings: The results came forward with a positive impact of financial integrity on financial stability across many countries. Findings indicated that economic and financial integration is the primary channel to mediate the effect of monetary extremity in economies. Fiscal policy should seek measures to reduce the risk of crisis transfer and increase the benefits of financial integration to achieve financial stability.
Research, Practical & Social implications: The study recommends considering financial integration for economic development and avoiding the occurrence of risk by considering a fiscal policy.
Originality/value: The results highlight the sectors where financial integration is required. Moreover, establishment of subsidiary international bank in the resident economy with the local financial centre’s loans has been emphasized.
Abdullah, M. A. (2023). COVID-19 Pandemic and Financial Performance. International Journal of Professional Business Review, 8(4), e0825. https://doi.org/10.26668/businessreview/2023.v8i4.825
Adam, K., Jappelli, T., Menichini, A., Padula, M., & Pagano, M. (2002). Analyse, compare and apply alternative indicators and monitoring methodologies to measure the evolution of capital market integration in the European Union. Report to the European Commission, 2002, 1-95.
Aikman, D., Bridges, J., Burgess, S., Galletly, R., Levina, I., O'Neill, C., & Varadi, A. (2018). Measuring risks to UK financial stability (No. 738). Bank of England. Retrieved from: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/measuring-risks-to-uk-financial-stability
Ali, B. J., & Oudat, M. S. (2021). Accounting Information System and Financial Sustainability of Commercial and Islamic Banks: A Review of The Literature. Journal of Management Information & Decision Sciences, 24(5).
Alrjoub, A. M. S., Al-Qudah, L. A. M., Al-Othman, L. N., Bataineh, A., Aburisheh, K. E., & Alkarabsheh, F. (2023). Information Technology and its Role in Improving the Quality of Financial Control due to Corona Pandemic: the Jordanian Income Tax as A Case Study. International Journal of Professional Business Review, 8(4), e01568. https://doi.org/10.26668/businessreview/2023.v8i4.1568
Amtenbrink, F. (2019). The European Central Bank’s intricate independence versus accountability conundrum in the post-crisis governance framework. Maastricht Journal of European and Comparative Law, 26(1), 165-179. https://doi.org/10.1177%2F1023263X18822789
Bahmani-Oskooee, M., & Fariditavana, H. (2015). Nonlinear ARDL approach, asymmetric effects and the J-curve. Journal of Economic Studies, 42(3), 519-530. https://doi.org/10.1108/JES-03-2015-0042
Castiglionesi, F., Feriozzi, F., & Lorenzoni, G. (2019). Financial integration and liquidity crises. Management Science, 65(3), 955-975. https://doi.org/10.1287/mnsc.2017.2841
Chinn, M. D., & Ito, H. (2008). A new measure of financial openness. Journal of comparative policy analysis, 10(3), 309-322. https://doi.org/10.1080/13876980802231123
Dafermos, Y., Nikolaidi, M., & Galanis, G. (2018). Climate change, financial stability and monetary policy. Ecological Economics, 152, 219-234. https://doi.org/10.1016/j.ecolecon.2018.05.011
Decressin, M. J., Fonteyne, M. W., & Faruqee, M. H. (2007). Integrating Europe's financial markets. International Monetary Fund. https://doi.org/10.5089/9781589066236.071
Dias, R., da Silva, J. V., & Dionísio, A. (2019). Financial markets of the LAC region: Does the crisis influence the financial integration?. International Review of Financial Analysis, 63, 160-173. https://doi.org/10.1016/j.irfa.2019.02.008
Drobyazko, S., Barwinska-Malajowicz, A., Slusarczyk, B., Chubukova, O., & Bielialov, T. (2020). Risk management in the system of financial stability of the service enterprise. Journal of Risk and Financial Management, 13(12), 300. https://doi.org/10.3390/jrfm13120300
Ehigiamusoe, K. U., & Lean, H. H. (2019). Do economic and financial integration stimulate economic growth?. A critical survey. Economics, 13(1). http://dx.doi.org/10.5018/economics-ejournal.ja.2019-4
Erauskin, I., & Turnovsky, S. J. (2019). International financial integration and income inequality in a stochastically growing economy. Journal of International Economics, 119, 55-74. https://doi.org/10.1016/j.jinteco.2019.04.003
Fernández A, Klein M W, Rebucci A, Schindler M, Uribe M (2016): Capital control measures: A new dataset. IMF Economic Review, 64(3):548-574. https://doi.org/10.1057/imfer.2016.11
Fok, D., van Dijk, D., & Franses, P. H. (2005). Forecasting aggregates using panels of nonlinear time series. International Journal of Forecasting, 21(4), 785-794. https://doi.org/10.1016/j.ijforecast.2005.04.015
Gonzalez, F. (2005). Bank regulation and risk-taking incentives: An international comparison of bank risk. Journal of Banking & Finance, 29(5), 1153-1184. https://doi.org/10.1016/j.jbankfin.2004.05.029
Higson, C., Holly, S., & Petrella, I. (2013). Is there financial integration in the equity markets of the European Union?. Economics & Finance Research, 1(1), 31-41. https://doi.org/10.1080/21649480.2012.751957
Hoffmann, P., Kremer, M., & Zaharia, S. (2020). Financial integration in Europe through the lens of composite indicators. Economics Letters, 194, 109344. https://doi.org/10.1016/j.econlet.2020.109344
Ilesanmi, K. D., & Tewari, D. D. (2019). Management of shadow banks for economic and financial stability in South Africa. Cogent Economics & Finance, 7(1), 1568849. https://doi.org/10.1080/23322039.2019.1568849
Inekwe, J. N., & Valenzuela, M. R. (2020). Financial integration and banking crisis. A critical analysis of restrictions on capital flows. The World Economy, 43(2), 506-527. https://doi.org/10.1111/twec.12855
Inekwe, J. N., Jin, Y., & Valenzuela, M. R. (2018). A new approach to financial integration and market income inequality. Emerging Markets Review, 37, 134-147. https://doi.org/10.1016/j.ememar.2018.07.002
Karlsson, S., & Löthgren, M. (2000). On the power and interpretation of panel unit root tests. Economics Letters, 66(3), 249-255. https://doi.org/10.1016/S0165-1765(99)00237-2
Khan, I., Khan, I., Sayal, A. U., & Khan, M. Z. (2022). Does financial inclusion induce poverty, income inequality, and financial stability: empirical evidence from the 54 African countries?. Journal of Economic Studies, 49(2), 303-314. https://doi.org/10.1108/JES-07-2020-0317
Kopp, E., Kaffenberger, L., & Wilson, C. (2017). Cyber risk, market failures, and financial stability. International Monetary Fund. https://www.imf.org/en/Home
Kose, M. A., Prasad, E. S., & Terrones, M. E. (2003). How does globalization affect the synchronization of business cycles?. American Economic Review, 93(2), 57-62. https://10.1257/000282803321946804
Lane, P. R., & Milesi-Ferretti, G. M. (2018). The external wealth of nations revisited: international financial integration in the aftermath of the global financial crisis. IMF Economic Review, 66, 189-222. https://doi.org/10.1057/s41308-017-0048-y
Motelle, S., & Biekpe, N. (2015). Financial integration and stability in the Southern African development community. Journal of Economics and Business, 79, 100-117. https://doi.org/10.1016/j.jeconbus.2015.01.002
Naguib, C. (2017). The relationship between inequality and growth: Evidence from new data. Swiss Journal of Economics and Statistics, 153(3), 183-225. https://doi.org/10.1007/BF03399507
Nardo, M., Ossola, E., & Papanagiotou, E. (2022). Financial integration in the EU28 equity markets: Measures and drivers. Journal of Financial Markets, 57, 100633. https://doi.org/10.1016/j.finmar.2021.100633
Nasir, M. A., Yago, M., Soliman, A. M., & Wu, J. (2016). Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework. Cogent Economics & Finance, 4(1), 1136098. https://doi.org/10.1080/23322039.2015.1136098
Nasreen, S., Anwar, S., & Ozturk, I. (2017). Financial stability, energy consumption and environmental quality: Evidence from South Asian economies. Renewable and Sustainable Energy Reviews, 67, 1105-1122. https://doi.org/10.1016/j.rser.2016.09.021
Nguyen, H. T., Pham, A. T. H., & Thuy, T. D. (2021). The Effectiveness of Macroprudential Policy on Credit Growth at Bank-Level Data in Vietnam. The Journal of Asian Finance, Economics and Business (JAFEB), 8, 325-334. https://doi.org/10.13106/jafeb.2021.vol8.no8.0325
Padhan, R., & Prabheesh, K. P. (2020). Business cycle synchronization: Disentangling the direct and indirect effect of financial integration in the Indian context. Economic Modelling, 85, 272-287. https://doi.org/10.1016/j.econmod.2019.10.010
Pak, O., & Iwata, K. (2020). A path to financial integration: steps for the Eurasian Economic Union. Asia Europe Journal, 18(1), 99-115. https://doi.org/10.1007/s10308-018-00531-1
Park, C. Y., & Lee, J. W. (2011). Financial integration in emerging Asia: Challenges and prospects. Asian Economic Policy Review, 6(2), 176-198. https://doi.org/10.1111/j.1748-3131.2011.01193.x
Pasara, M. T., & Diko, N. (2020). The effects of AfCFTA on food security sustainability: an analysis of the cereals trade in the SADC region. Sustainability, 12(4), 1419. https://doi.org/10.3390/su12041419
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-670. https://doi.org/10.1111/1468-0084.0610s1653
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Quinn, D. P., & Toyoda, A. M. (2008). Does capital account liberalization lead to growth?. The Review of Financial Studies, 21(3), 1403-1449. https://doi.org/10.1093/rfs/hhn034
Sehgal, S., Pandey, P., & Deisting, F. (2018). Time-varying integration amongst the South Asian equity markets: An empirical study. Cogent Economics & Finance, 6(1), 1452328. https://doi.org/10.1080/23322039.2018.1452328
Sehrawat, M., & Giri, A. K. (2015). Financial development and economic growth: empirical evidence from India. Studies in Economics and Finance, 32(3), 340-356. https://doi.org/10.1108/SEF-10-2013-0152
Selvarajan, S. K., & Ab-Rahim, R. (2020). Financial integration and economic growth. Journal of Economic Integration, 35(1), 191-213. https://doi.org/10.11130/jei.2020.35.1.191
Simola, A., Boysen, O., Ferrari, E., Nechifor, V., & Boulanger, P. (2022). Economic integration and food security–The case of the AfCFTA. Global Food Security, 35, 100651. https://doi.org/10.1016/j.gfs.2022.100651
T Adeyele, I. Y. E. W. U. M. I., & Ouedraogo, I. (2019). Effect of Regional Financial Integration and Governance Quality on Economic Growth in ECOWAS (2001-2016). Journal of Economics and Allied Research, 3(2), 1-17.
Tang, A., & Yao, W. (2022). The effects of financial integration during crises. Journal of International Money and Finance, 124, 102613. https://doi.org/10.1016/j.jimonfin.2022.102613
Tofan, M., Roman, A., & Bilan, I. (2017). The Proceedings of the International Conference on European Financial Regulation. Retrieved from: Microsoft Word - volum_EUFIRE_2017_docx (uaic.ro)
Tran, H. H., Le, T. P. T. D., Nguyen, V. T. H., Le, D. T. A., & Trinh, N. H. (2021). The impact of financial integration on monetary policy independence: The case of Vietnam. The Journal of Asian Finance, Economics and Business, 8(2), 791-800. https://doi.org/10.13106/jafeb.2021.vol8.no2.0791
Tran, T. V., & Hoang, T. M. (2021). The Effect of International Capital Flows on Corporate Capital Structures: Empirical Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 8(4), 263-276. https://doi.org/10.13106/jafeb.2021.vol8.no4.0263
Van Zyl, L. (2003). South Africa’s experience of regional currency areas and the use of foreign currencies. Regional currency areas and the use of foreign currencies, 134-39. https://www.bis.org/publ/bppdf/bispap17o.pdf
Xu, M. T., Hu, K., & Das, M. U. S. (2019). Bank profitability and financial stability. International Monetary Fund. https://www.imf.org/en/Home
How to Cite
Copyright (c) 2023 Sufian Radwan Almanaseer
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Authors who publish in this journal agree to the following terms: the author(s) authorize(s) the publication of the text in the journal;
The author(s) ensure(s) that the contribution is original and unpublished and that it is not in the process of evaluation by another journal;
The journal is not responsible for the views, ideas and concepts presented in articles, and these are the sole responsibility of the author(s);
The publishers reserve the right to make textual adjustments and adapt texts to meet with publication standards.
Authors retain copyright and grant the journal the right to first publication, with the work simultaneously licensed under the Creative Commons Atribuição NãoComercial 4.0 (http://creativecommons.org/licenses/by-nc/4.0/), which allows the work to be shared with recognized authorship and initial publication in this journal.
Authors are allowed to assume additional contracts separately, for non-exclusive distribution of the version of the work published in this journal (e.g. publish in institutional repository or as a book chapter), with recognition of authorship and initial publication in this journal.
Authors are allowed and are encouraged to publish and distribute their work online (e.g. in institutional repositories or on a personal web page) at any point before or during the editorial process, as this can generate positive effects, as well as increase the impact and citations of the published work (see the effect of Free Access) at http://opcit.eprints.org/oacitation-biblio.html