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Can Reforms Promoting Growth Increase Financial Fragility?: An Empirical Assessment

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  • Aida Caldera Sánchez

    (OECD)

  • Filippo Gori

    (OECD)

Abstract

Certain growth-promoting policies can have negative side-effects by increasing the vulnerability of economies to financial crises. Typical examples are greater openness to financial flows or more liberalised financial markets. This paper investigates whether the growth benefits of policy reforms in these growth-enhancing areas, and others such as trade openness, exceed the possible costs of occasional, albeit potentially severe, crises for a sample of 100 developed and emerging economies from 1970 to 2010. The results suggest that the pro-growth effects of greater capital account openness outweigh the negative effects of a higher propensity to twin crises. Greater domestic financial liberalisation is associated with faster growth, but also with a higher propensity to systemic banking and twin crises. A free floating exchange rate and greater openness to trade, by reducing the likelihood of currency crises, are associated with higher growth. While pro-competitive product market regulations and lower corporate taxes are associated with higher growth, they do not seem to influence financial fragility via higher probability of crises. Les réformes visant à promouvoir la croissance augmentent-elles la fragilité financière? : Un bilan empirique Certaines politiques visant à favoriser la croissance peuvent avoir un impact négatif en augmentant la vulnérabilité des économies aux crises financières. Une plus grande ouverture aux flux financiers ou des marchés financiers plus libéralisés en sont des exemples types. Cet article examine si les avantages des réformes des politiques de croissance dans ces domaines, et d'autres tels que l'ouverture au commerce international, dépassent les coûts éventuels et potentiellement séveres des crises financières pour un échantillon de 100 pays développés et économies émergentes sur la période allant de 1970 à 2010. Les résultats suggèrent que les effets positifs sur la croissance d'une plus grande ouverture du compte de capital l'emportent sur les effets négatifs d'une plus forte propension des crises jumelles. La libéralisation financière est associée à une croissance plus rapide, mais aussi à une plus forte propension à des crises bancaires systémiques et aux crises jumelles. Un taux de change flottant et une plus grande ouverture au commerce stimulent la croissance en réduisant la probabilité des crises de change. Alors que la réglementation du marché des produits favorables à la concurrence et des impôts des sociétés plus faibles sont associés à une plus forte croissance, ils ne semblent pas influer sur la fragilité financière par l'intermédiaire d'une probabilité plus élevée aux crises.

Suggested Citation

  • Aida Caldera Sánchez & Filippo Gori, 2016. "Can Reforms Promoting Growth Increase Financial Fragility?: An Empirical Assessment," OECD Economics Department Working Papers 1340, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1340-en
    DOI: 10.1787/5jln0421ld25-en
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    6. Stephanie Guichard, 2017. "10 Years after the Global Financial Crisis: What Have We Learnt About International Capital Flows?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-30, October.
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    More about this item

    Keywords

    financial crisis; financial liberalisation; financial stability; growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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