Advanced Search
MyIDEAS: Login to save this paper or follow this series

What matters for financial development? : capital controls, institutions, and interactions

Contents:

Author Info

  • Chinn,M.D.
  • Ito,H.

    (University of Wisconsin-Madison, Social Systems Research Institute)

Abstract

We extend our earlier work, focusing on the links between capital account liberalization, legal and institutional development, and financial development, especially that in equity markets. In a panel data analysis encompassing 108 countries and twenty years ranging from 1980 to 2000, we explore several dimensions of the financial sector. First, we test whether financial openness can lead to equity market development when we control for the level of legal and institutional development. Then, we examine whether the opening of the goods sector is a precondition for financial opening. Finally, we investigate whether a well-developed banking sector is a precondition for financial liberalization to lead to equity market development and also whether bank and equity market development complements or substitutes. Our empirical results suggest that a higher level of financial openness contributes to the development of equity markets only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Among emerging market countries, a higher level of bureaucratic quality and law and order, as well as the lower levels of corruption, increases the effect of financial opening in fostering the development of equity markets. We also find that the finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as the general legal/institutional variables. In examining the issue of the sequencing, we find that the liberalization in cross-border goods transactions is found to be a precondition for capital account liberalization. Our findings also indicate that the development in the banking sector is a precondition for equity market development, and that the developments in these two types of financial markets have synergistic effects.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ssc.wisc.edu/econ/archive/wp2005-04.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 4.

as in new window
Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:att:wimass:20054

Contact details of provider:
Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Claessens, Stijn & Klingebiel, Daniela & Schmukler, Sergio, 2002. "Explaining the Migration of Stocks from Exchanges in Emerging Economies to International Centres," CEPR Discussion Papers 3301, C.E.P.R. Discussion Papers.
  2. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  3. 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.
  4. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
  5. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
  6. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
  7. Aaron Tornell & Frank Westermann & Lorenza Martínez, 2004. "The Positive Link Between Financial Liberalization, Growth, and Crises," CESifo Working Paper Series 1164, CESifo Group Munich.
  8. Ashoka Mody & Antu Panini Murshid, 2002. "Growing Up with Capital Flows," IMF Working Papers 02/75, International Monetary Fund.
  9. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
  10. Claessens, Stijn & Djankov, Simeon & Joseph P. H. Fan & Lang, Larry H. P., 1999. "Expropriation of minority shareholders : evidence from East Asia," Policy Research Working Paper Series 2088, The World Bank.
  11. Michael Klein & Giovanni Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston.
  12. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  13. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  14. Stephen Brown & William Goetzmann, 2001. "Hedge Funds With Style," Yale School of Management Working Papers ysm21, Yale School of Management, revised 01 Apr 2008.
  15. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
  16. Menzie D. Chinn & Michael P. Dooley & Sona Shrestha, 1999. "Latin America and East Asia in the Context of an Insurance Model of Currency Crises," NBER Working Papers 7091, National Bureau of Economic Research, Inc.
  17. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics.
  18. Fung, William & Hsieh, David A, 2001. "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 313-41.
  19. Glick, Reuven & Guo, Xueyan & Hutchison, Michael M., 2004. "Currency Crises, Capital Account Liberalization, and Selection Bias," Santa Cruz Department of Economics, Working Paper Series qt12t6x2ht, Department of Economics, UC Santa Cruz.
  20. Mark M. Spiegel, 2001. "Financial development and growth: are the APEC nations unique?," Pacific Basin Working Paper Series 2001-04, Federal Reserve Bank of San Francisco.
  21. G. Andrew Karolyi, 2004. "The Role of American Depositary Receipts in the Development of Emerging Equity Markets," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 670-690, August.
  22. Arteta, Carlos & Eichengreen, Barry & Wyplosz, Charles, 2001. "When Does Capital Account Liberalization Help More Than it Hurts?," CEPR Discussion Papers 2910, C.E.P.R. Discussion Papers.
  23. Sebastian Edwards, 1999. "How Effective are Capital Controls?," NBER Working Papers 7413, National Bureau of Economic Research, Inc.
  24. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," NBER Working Papers 8852, National Bureau of Economic Research, Inc.
  25. Graciela Kaminsky & Sergio Schmukler, 2003. "Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization," NBER Working Papers 9787, National Bureau of Economic Research, Inc.
  26. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2000. "A new database on financial development and structure," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125518, Tilburg University.
  27. Sergei Sarkissian, 2004. "The Overseas Listing Decision: New Evidence of Proximity Preference," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 769-809.
  28. Woochan Kim & Shang-Jin Wei, 2001. "Offshore Investment Funds: Monsters in Emerging Markets?," Working Papers 052001, Hong Kong Institute for Monetary Research.
  29. Stiglitz, Joseph E., 2000. "Capital Market Liberalization, Economic Growth, and Instability," World Development, Elsevier, vol. 28(6), pages 1075-1086, June.
  30. Michael Leahy & Sebastian Schich & Gert Wehinger & Florian Pelgrin & Thorsteinn Thorgeirsson, 2001. "Contributions of Financial Systems to Growth in OECD Countries," OECD Economics Department Working Papers 280, OECD Publishing.
  31. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2000. "Emerging Equity Markets and Economic Development," NBER Working Papers 7763, National Bureau of Economic Research, Inc.
  32. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  33. Ito, Hiro, 2004. "Is Financial Openness a Bad Thing? An Analysis on the Correlation Between Financial Liberalization and the Output Performance of Crisis-Hit Economies," Santa Cruz Center for International Economics, Working Paper Series qt5zb2v4c5, Center for International Economics, UC Santa Cruz.
  34. Ross Levine, 2002. "Bank-Based or Market-Based Financial Systems: Which is Better?," NBER Working Papers 9138, National Bureau of Economic Research, Inc.
  35. Levine, Ross & Schmukler, Sergio L., 2003. "Migration, spillovers, and trade diversion : the impact of internationalization on stock market liquidity," Policy Research Working Paper Series 3046, The World Bank.
  36. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 81-103, February.
  37. Rodolfo Martell & Ren� M. Stulz, 2003. "Equity-Market Liberalizations as Country IPO's," American Economic Review, American Economic Association, vol. 93(2), pages 97-101, May.
  38. Jacques Miniane, 2004. "A New Set of Measures on Capital Account Restrictions," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 4.
  39. Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc.
  40. Gerard Caprio & Luc Laeven & Ross Levine, 2003. "Governance and Bank Valuation," NBER Working Papers 10158, National Bureau of Economic Research, Inc.
  41. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
  42. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2000. "A New Database on the Structure and Development of the Financial Sector," World Bank Economic Review, World Bank Group, vol. 14(3), pages 597-605, September.
  43. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
  44. Joshua Aizenman, 2002. "Financial Opening: Evidence and Policy Options," NBER Working Papers 8900, National Bureau of Economic Research, Inc.
  45. Michael P. Dooley, 1995. "A Survey of Academic Literatureon Controls Over International Capital Transactions," IMF Working Papers 95/127, International Monetary Fund.
  46. Thorsten Beck & Ross Levine, 2004. "Legal Institutions and Financial Development," NBER Working Papers 10417, National Bureau of Economic Research, Inc.
  47. Torsten Sløk & Michael Klein & Luca Antonio Ricci & Hali J. Edison, 2002. "Capital Account Liberalization and Economic Performance," IMF Working Papers 02/120, International Monetary Fund.
  48. Michael P. Dooley, 1996. "A Survey of Literature on Controls over International Capital Transactions," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 639-687, December.
  49. Natalia T. Tamirisa & R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 98/181, International Monetary Fund.
  50. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  51. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
  52. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30.
  53. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04.
  54. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:att:wimass:20054. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ailsenne Sumwalt).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.