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Does financial liberalization spur growth?

  • Bekaert, Geert
  • Harvey, Campbell R.
  • Lundblad, Christian

We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The liberalization effect is not spuriously accounted for by macro-economic reforms and does not reflect a business cycle effect. Although financial liberalizations further financial development, measures of financial development fail to fully drive out the liberalization effect. The investment/GDP ratio increases post liberalization, with the investment partially financed by foreign capital inducing worsened trade balances. Differentiating across liberalizing countries, a large secondary school enrollment, a small government sector and an Anglo-Saxon legal system tend to enhance the liberalization effect. Finally, the conditional convergence effect is larger once financial liberalization is accounted for.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 77 (2005)
Issue (Month): 1 (July)
Pages: 3-55

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Handle: RePEc:eee:jfinec:v:77:y:2005:i:1:p:3-55
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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