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Opening The Financial Sector To Foreign Competition: Assessing The Dynamic Macroeconomic Consequences Using A Two-Sector Growth Model

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  • YUAN K. CHOU

    (Department of Economics, University of Melbourne, VIC 3010, Australia)

  • MARTIN S. CHIN

    (Department of Economics, University of Melbourne, VIC 3010, Australia)

Abstract

This paper uses an economic growth model with a financial sector to examine the conditions under which financial liberalization is desirable from the perspective of a policymaker who cares about the well-being of domestic households. Financial liberalization raises the rate of financial innovation and the efficiency of financial intermediation, but typically causes large foreign firms from leading-edge countries to displace smaller and less efficient domestic firms. Profits are repatriated abroad instead of accruing to domestic households as dividends. This trade-off is further complicated when we allow financial firms to hire talented foreigners once liberalization has taken place. Simulations of the model indicate that the case for financial liberalization is stronger when agents are more impatient, spillover effects of current financial innovation on future innovation are larger, financial innovations are more susceptible to congestion in their use, and when knowledge diffuses more quickly from foreign to domestic workers.

Suggested Citation

  • Yuan K. Chou & Martin S. Chin, 2004. "Opening The Financial Sector To Foreign Competition: Assessing The Dynamic Macroeconomic Consequences Using A Two-Sector Growth Model," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 49(02), pages 195-224.
    • Handle: RePEc:wsi:serxxx:v:49:y:2004:i:02:n:s0217590804000883
    DOI: 10.1142/S0217590804000883
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    References listed on IDEAS

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    1. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    2. Helios HERRERA & Enrique SCHROTH, 2001. "The Welfare Implications of Non-Patentable Financial Innovations," FAME Research Paper Series rp82, International Center for Financial Asset Management and Engineering.
    3. Yuan K. Chou, 2003. "A Pedagogical Tool For Illustrating The Real Impact Of The Financial Sector," Department of Economics - Working Papers Series 888, The University of Melbourne.
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