Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates

This paper analyzes the effects of financial globalization on growth in developing countries, focusing on its interaction with exchange rate volatility. Based on dynamic panel data models and the two-step system generalized method of moments (GMM) estimator, it replicates the method of Gaies et al. (2019a; 2019b) and extends it by exploring a new spillover effect of financial globalization in terms of exchange rate volatility measured by six different indicators. The findings show the positive influence of investment–globalization (foreign direct investment and portfolio investment) on growth through the traditional channel of capital accumulation and by reducing the negative impact of exchange rate volatility. These impacts are not insured by indebtedness–globalization (foreign debt), thereby shedding light on the government’s decision in developing countries on foreign capital control policy. These results are robust to changes in the estimator and variables used.