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Financial Liberalisation, Crises, and Economic Growth

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  • Inkoo Lee

    (Korea Institute for International Economic Policy)

  • Jonghyup Shin
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    Abstract

    It has been widely recognized that financial liberalization plays an important role in economic development. Although an expanding body of literature has documented this effect across space and time, the channel through which financial liberalization affects the economic growth remains unclear. This paper employs probit and panel regressions to show that financial liberalization is positively associated with economic growth, with the (positive) direct liberalization effect dominating the (negative) indirect crisis effect. Financial liberalization is expected to increase GDP growth by 0.92 percentage point in the whole sample and by 0.99 percentage point in crisis experienced countries, respectively. Financial liberalization contributes to economic growth even when the sample is restricted to countries that experienced financial crises. We also test the effect of financial liberalization on the interest rates. The result is contrary to our expectation : financial liberalization increases the interest rates. We conjecture that the overshooting in interest rates after a crisis and the removal of interest rate ceiling after liberalization are the main reasons for this phenomenon.

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    File URL: http://www.eaber.org/node/22030
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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22030.

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    Date of creation: Jan 2007
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    Handle: RePEc:eab:financ:22030

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    Related research

    Keywords: financial liberalisation; crises; economic growth; panel; probit model;

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    1. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(4), pages 887-935, December.
    2. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, Elsevier, vol. 77(1), pages 3-55, July.
    3. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
    4. Ranciere, Romain & Tornell, Aaron & Westermann, Frank, 2006. "Decomposing the effects of financial liberalization: Crises vs. growth," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(12), pages 3331-3348, December.
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