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Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization

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  • Mr. Sergio L. Schmukler
  • Graciela Laura Kaminsky

Abstract

We examine the short- and long-run effects of financial liberalization on capital markets. To do so, we construct a new comprehensive chronology of financial liberalization in 28 mature and emerging market economies since 1973. We also construct an algorithm to identify booms and busts in stock market prices. Our results indicate that financial liberalization is followed by more pronounced boom-bust cycles in the short run. However, financial liberalization leads to more stable markets in the long run. Finally, we analyze the sequencing of liberalization and institutional reforms to understand the contrasting short- and long-run effects of liberalization.

Suggested Citation

  • Mr. Sergio L. Schmukler & Graciela Laura Kaminsky, 2003. "Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization," IMF Working Papers 2003/034, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/034
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    More about this item

    Keywords

    WP; financial liberalization; liberalization reform; insider trading; capital controls; financial integration; stock market prices; booms; busts; financial cycles; liberalization episode; repression times; mature market; short-run liberalization; Stock markets; Emerging and frontier financial markets; Financial sector; Capital account; Real interest rates; Asia and Pacific; Europe; Global;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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