International financial integration and financial stress of emerging market economies: The role of institutional quality

In the wake of unprecedented financial liberalization policies adopted by Emerging Market Economies (EMEs) since the late 20th century, their integration into global financial markets has brought forth both opportunities and challenges. This paper endeavors to assess the intricate relationship betwe...

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Bibliographic Details
Published in:Emerging markets review 2024-12, Vol.63, p.101214, Article 101214
Main Authors: Tan, Sook-Rei, Yeap, Xiu Wei, Li, Changtai
Format: Article
Language:English
Subjects:
Emerging market economies
Financial stress index
International financial integration
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Summary:In the wake of unprecedented financial liberalization policies adopted by Emerging Market Economies (EMEs) since the late 20th century, their integration into global financial markets has brought forth both opportunities and challenges. This paper endeavors to assess the intricate relationship between international financial integration (IFI) and financial stress in EMEs, focusing on the potential moderating effect of institutional quality. Addressing key questions, it examines how various IFI indicators impact financial stress and evaluates the role of different dimensions of institutional quality in influencing this relationship. Using a Financial Stress Index (FSI) and employing the panel threshold regression technique, the study unveils significant threshold effects of institutional quality on the IFI-FSI nexus, with variations across different institutional factors. This study underscores the vital need for policymakers to identify threshold levels in institutional quality indicators to strike a balance between attracting investments and preventing unwarranted financial distress. •Increased IFI is linked to higher FSI in emerging market economies.•Adding institutional quality and IFI interaction shows institutional quality mitigates the impact of IFI on FSI.•However, panel threshold regression shows mixed results on institutional quality’s moderating effect.•IFI impact on FSI turns negative with moderate Control of Corruption, Voice and Accountability, and Government Effectiveness.•As institutional quality indicators rise, the impact and/or significance of IFI on FSI generally tends to decrease.
ISSN:1566-0141
DOI:10.1016/j.ememar.2024.101214