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Financial Liberalization, Crises, and Economic Growth

  • Inkoo Lee

    (Department of International Macroeconomics and Finance, Korea Institute for International Economic Policy, 300-4 Yomgok-dong, Seocho-gu, Seoul 137-747, Korea,)

  • Jong-Hyup Shin

    (Department of International Macroeconomics and Finance, Korea Institute for International Economic Policy, 300-4 Yomgok-dong, Seocho-gu, Seoul 137-747, Korea,)

The paper computes the effect of financial liberalization on economic growth by combining the results of a panel model with those of a probit model. It finds a positive net effect from financial liberalization to growth. Surprisingly, we find that the net effect on growth is larger in the crisis-experienced country group than in the overall sample group. Our guess is that the crisis-experienced countries are mostly developing countries that usually enjoy higher growth rates than the developed countries because of the catching-up phenomenon. The paper also studies the link between financial liberalization and nominal interest rates, and finds, contrary to expectations, that the direct liberalization effect is positive. Our guess is that this reflected the overshooting of interest rates after crises. (c) 2008 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 7 (2008)
Issue (Month): 1 (January)
Pages: 106-115

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Handle: RePEc:tpr:asiaec:v:7:y:2008:i:1:p:106-115
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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Does Financial Liberalization Spur Growth?," Working Paper Research 53, National Bank of Belgium.
  3. Ranciere, Romain & Tornell, Aaron & Westermann, Frank, 2006. "Decomposing the effects of financial liberalization: Crises vs. growth," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3331-3348, December.
  4. Henry, Peter B., 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Research Papers 1974, Stanford University, Graduate School of Business.
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