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Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries' portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries.

Banks & Banking Reform --- Bond markets --- Debt Markets --- Domestic financial markets --- Economic Theory & Research --- Emerging Markets --- Equity markets --- International financial integration --- International financial markets --- Macroeconomics and Economic Growth --- Mutual Funds

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Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries' portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries.

Banks & Banking Reform --- Bond markets --- Debt Markets --- Domestic financial markets --- Economic Theory & Research --- Emerging Markets --- Equity markets --- International financial integration --- International financial markets --- Macroeconomics and Economic Growth --- Mutual Funds

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Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China's foreign direct investment liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are "short equity, long debt." Third, China and India have improved their net external positions over the past decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies, domestic financial sector policies, and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset and liability holdings) and, consequently, the international financial system.

Balance Sheets --- Bank Policy --- Borrowers --- Capital Flows --- Currencies and Exchange Rates --- Debt --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Equity --- Exchange --- Exchange Rate --- External Assets --- Finance and Financial Sector Development --- Financial Developments --- Financial Liberalization --- Financial Literacy --- Holdings --- Income Level --- International Financial Integration --- International Financial System --- Investment --- Investment and Investment Climate --- Investment Rates --- Liabilities --- Macroeconomics and Economic Growth --- Private Sector Development --- Reserves --- Share

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July 2000 - Empirical econometric evidence shows that Mexico's simulated output recovery after a negative external shock was faster (a third as long) when the country's policymakers let the nominal foreign exchange rate float than when they fixed it, and much faster than in other developing countries that kept nominal foreign exchange rates constant, especially those that resorted to currency board arrangements to support that constancy. The academic and policy debate about optimal foreign exchange rate regimes for emerging economies has focused more on the theoretical costs and benefits of possible regimes than on their actual performance. Giugale and Korobow report on what can be called exchange-rate-regime-dependent differential shock persistence-that is, the time output takes to return to its trend after a negative shock-in a sample of countries representing various points on the spectrum of nominal foreign exchange flexibility. They find strong evidence that Mexico's simulated output recovery after a negative external shock was faster (a third as long) when the country's policymakers let the nominal foreign exchange rate float than when they fixed it, and much faster than in other developing countries that kept nominal foreign exchange rates constant, especially those that resorted to currency board arrangements to support that constancy. These results are insufficient to guide the choice of regime (they lack general equilibrium value and are based on a limited sample of countries), but they highlight an important practical consideration in making that choice: How long it takes for output to adjust after negative shocks is sensitive to the level of rigidity of the foreign exchange regime. This factor may be critical when the social costs of those adjustments are not negligible. This paper-a product of the Mexico Country Department, Latin America and the Caribbean Region-is part of a larger effort in the region to understand policy options open to developing countries for handling macroeconomic volatility in a globalized economy. The authors may be contacted at mgiugale@worldbank.org or akorobow@worldbank.org.

Currencies and Exchange Rates --- Currency --- Currency Board --- Currency Board Arrangements --- Currency Boards --- Debt Markets --- Domestic Economy --- Econometric Evidence --- Economic Stabilization --- Economic Theory and Research --- Economies --- Emerging Markets --- Exchange Rate Flo Exchange Rate Regime --- Exchange Regime --- External Shock --- Finance and Financial Sector Development --- Financial Crises --- Fiscal and Monetary Policy --- Foreign Exchange --- Foreign Exchange Rate --- Foreign Exchange Rates --- Inflation --- International Financial Integration --- Macroeconomic Management --- Macroeconomics and Economic Growth --- Monetary Unions --- Open Capital Accounts --- Private Sector Development --- Public Sector Development --- Structural Reform

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International finance --- Organisation for Economic Co-operation and Development --- AA / International- internationaal --- 334.10 --- 339.113 --- 382.30 --- 333.432.8 --- 382.10 --- Algemene economie : algemeenheden. --- Buitenlandse investeringen. --- Handels- en wisselpolitiek in hun verband met de buitenlandse handel: algemeenheden. --- Internationale monetaire organisatie. Internationaal Muntfonds. Algemene leningovereenkomsten. --- Theorieën van internationale en interregionale handel: algemeenheden. Comparatieve voordelen. --- Algemene economie : algemeenheden --- Buitenlandse investeringen --- Handels- en wisselpolitiek in hun verband met de buitenlandse handel: algemeenheden --- Internationale monetaire organisatie. Internationaal Muntfonds. Algemene leningovereenkomsten --- Theorieën van internationale en interregionale handel: algemeenheden. Comparatieve voordelen --- International financial integration