International financial integration, economic growth and threshold effects: some panel evidence for Europe

Abstract

This paper applies the Seo and Shin (2016) method for estimating dynamic panels with endogenous threshold effects to obtain new, robust evidence on nonlinearities in the relationship between international financial integration (IFI) and economic growth. This approach is based on a first-differenced GMM estimator which allows both the threshold variable and the regressors to be endogenous. More specifically, the present study analyses yearly data for 40 European countries from 1996 to 2021, this European focus yielding novel insights into a region with a diverse economic landscape. The IFI–growth nexus is examined using various IFI measures and thresholds reflecting country-specific characteristics, and then the analysis is extended by comparing the impact of the 2007–2009 global financial crisis (GFC) and of the Covid-19 pandemic respectively on the relationship of interest. The results provide clear evidence of nonlinearities and suggest that the effects of financial integration on economic growth vary depending on factors such as the level of financial development, trade openness, institutional quality, political and economic uncertainty, initial income, and financial openness. Further, the 2007–2009 GFC appears to have had a more significant impact than the Covid-19 pandemic.