This paper uses the economic growth model with a financial sector developed in Chou and Chin (2001) to examine the conditions under which financial liberalization is desirable from the perspective of a policymaker who is concerned about the well-being of domestic households. Financial liberalization raises the rate of financial innovations 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.
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Length: 30 pages Date of creation: 2002 Date of revision: Handle: RePEc:mlb:wpaper:835
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Find related papers by JEL classification: G20 - Financial Economics - - Financial Institutions and Services - - - General G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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